Friday, June 20, 2008

Grain Bull Signals an End

My indicators on the daily chart have indicated an end to the grain bull of the past few weeks. Unless prices surge higher at the beginning of trading next week, this bull is done! Here are the daily charts of the three major grains I trade.


Saudis Boost Oil Production Even More

On the eve of a historic meeting in Jeddah, Saudi Arabia for both oil producing and consuming nations, the Saudis have graciously announced that they will increase oil production by 500,000 barrels a day. Just a few days ago, they said they would increase by 200,000 barrels a day.

It's a Stock Market Bloodbath!

The stock market indexes, having broken through key technical support on both the Dow and S&P 500 indexes, are in freefall today.

Risk Aversion Trumps Potential Profits!

I frequently hear asset management people tell people to hold onto stocks that are falling with the justification that eventually, they just have to turn around, or that they have fallen so far, they must have hit bottom. They reason that prices must move higher, and investors should therefore remain in them so that they don't lose out on the opportunity when stocks eventually move higher. I disagree with this philosophy for various reasons:
  1. Opportunity Loss -- Every dollar that is invested in a losing stock/trade is a dollar that can't be used in a winning stock or trade. If that money is locked up in a bad trade, there are a myriad of opportunities missed that might have made money instead! One opportunity that is lost on a falling stock is the opportunity to short it instead. Even if -- like me -- you don't short stocks, you could profit from buying an ETF that does short that market sector! You could be making money from the ill sentiment toward that stock, instead of losing it. Or you could at least stop the loss by hedging with an inverse ETF in the same sector. Perhaps the greatest opportunity missed with this philosophy is the opportunity to have purchased that same stock or ETF at a much lower price. Taking a small, early loss is the only way to avoid this opportunity loss.
  2. Clear Head -- When you exit a bad trade, your analytical skills improve immediately because you have cleared your head and can see the markets with a more objective perspective. It is amazing how releasing our minds from the emotion of a bad trade can help us to more clearly recognize the good ones.
  3. Irrational Markets -- There is a saying (don't know who to attribute it to) that the financial markets can remain irrational longer than you have money to wait out that irrationality. This is true! You'll go bankrupt waiting for that "inevitable" turnaround that you just knew would eventually come. Even if that turnaround does come one day, there is a good chance you'll never see it because you'll lose your money waiting for it. It also seems to come just when we have been pushed out of the market after we just couldn't stand any more loss.
    One of my favorite thoughts from Phantom of the Pits is that we must recognize the blessing of a small loss. He also says that the trader who loses least, wins most.
  4. The "Falling Knife" -- This idea comes from the very potent image that if you try to catch (or in this case, hold onto) a falling knife, you will get very bloody and experience severe physical trauma. The same concept is also true of our finances. Trying to catch a falling stock also bloodies the financial waters of our lives just as surely as catching a physical knife blade does. These financial "gurus" who suggest "holding on" to losing investments always reason that because prices have fallen substantially, they must therefore begin to rise now. No, they don't! Prices that are down can go even lower. Much lower! Momentum is to the downside! Stocks can go to zero! Don't try to catch a falling knife! Take your losses early, and you'll not only sleep better at night, but you'll also be able to keep a clear head (#2 above) to select other investments and get back into the market to make money instead.
  5. Fox in the Hen-House -- Many of these supposed investment advisers and experts are in a losing market position themselves. It is true that "misery loves company". Many of these people (or their clients) are losing money on the same stocks they are recommending to others, and therefore they are hoping that by suggesting that other people buy them also, their own (or their clients') loses will stop and the stocks they recommend will start to move higher again, thus rescuing them from their own misery and losses. Corporate executives are notorious for recommending their stocks even while they are selling those same stocks themselves. These people have a gross conflict of interest, so all their comments should be taken with a grain of salt -- better yet, a pound or two of salt. This is also true for many investment advisers.
I would rather exit a bad trade quickly (Phantom's Rule #1), and buy that stock back again later at a much better price when the bottom has truly formed and when my thinking is clear. Thus, my purchase price is better and my return on investment is also improved versus someone that buys and holds regardless of market turmoil.

Miss First 20% and Last 20% of Trend
One investment tip that I have heard attributed to the Rothschilds (although I don't know if this is true) is that they don't try to catch the first 20% or the last 20% of a stock's rise. If someone holds onto a bad trade, they stand to risk all or most of the rise, not just miss the first or last 20%. I have found that my trading methodology allows me to accomplish this -- getting in at the early stages of a new trend, and getting out just as the momentum is starting to wane. Sometimes I'm wrong, but more often than not, I'm successful, and my successful trades are far more profitable than my bad ones. Learning strong technical analysis skills helps tremendously to reduce the risk and raise profits.

Best Book on Risk Vs. Profits
My philosophy on focusing on reducing risk instead of on profits was influenced heavily by Phantom of the Pits in his book, "Phantom's Gift". It's the best book on trading that I've read, and what makes it even better is that it is available free. That's not just a bargain. From the perspective of return on investment (ROI), it's value is therefore literally infinite! My only real investment is the time to read it and the effort to change my behavior. I can't make a better investment than that!

Crude Oil Moves Higher on Expiration Day

This chart is today's tick chart for the oil contract that expires today. Since the contract will expire today, the volume is relatively weak compared to more active contracts. Just one week ago, this contract had volume of many times more than today.

If prices dropped precipitously on the expiration day of a futures contract, one could make the argument that the off-setting activity of speculators was the key cause of that rapid drop; commensurately, one could make the case that the rising prices prior to today were also caused by speculators. However, since prices are rising strongly on the day of contract expiration, as speculators are being forced to sell en masse to exit the market, this is evidence that commercial hedgers are driving oil prices higher, not speculators. While these commercial hedgers are the key reason that prices move higher, both commercial hedgers and speculators add needed liquidity to the market.

S&P 500 Breaks Through Support Also

The S&P 500 Index has also broken through key support at 1330. It is doesn't rebound by the end of the day, or if it goes substantially lower, prices will likely go much lower still in the near future. We may test the lows of last Spring.

The NASDAQ too is plunging, but without support levels, it goes down even faster!

Dow Breaking Below Key 12,000 Level

This could spell much lower stock prices to come. It remains to be seen if stocks can rally to take the stock indexes back above key technical support levels, but by just looking at these charts, the probability doesn't look that good.

Rumors of War Sends Oil Higher Again

Talk of Israel carrying out war preparations for possible strikes against Iran are sending oil prices into high, record territory again. Will it never end?

Commodity Commercial Hedgers Increasing Their Presence

With food and energy commodities having increased their prices so much over the past year, more businesses are being forced to participate in the futures markets that never have before. Why? Because they must hedge the higher prices. These market participants are not speculators. They are commercial hedgers who are buying to take delivery of these commodities to use them in their products. Ironically, with so many more commercial participants taking long-only positions in the futures markets, this may be pushing prices still higher. These commercials, by the way, represent 80% of the trading volume in the futures markets! They outnumber the speculators by several times!

Here is the definition of commercials from the Bloomberg website:

Commercial Hedgers
Commercials that take futures positions in commodities so that they can guarantee prices at which they will buy raw materials or sell their products.

Stock Traders -- Selling the Rallies

The daily chart for the S&P 500 (left) shows that stocks have been on a distinct downtrend now for the past few weeks. It appears to have been triggered by the bad jobs report two weeks ago. It seems like every day, new revelations come to light that wear down stocks. Stock traders, with so much bad news arriving almost daily, are selling the rallies, including selling after yesterday's higher close (right chart), which was the first one this week.

I am watching the Dow 1,990-2,000 level, and the S&P 1330-1340 level. These are key technical support levels. The futures this morning, having sold off somewhat overnight, appear poised to make another attempt to breach these levels and continue the downward slide. These are the dog days of summer for stocks, and it's only June!

Food Inflation Just Beginning

Eric Claus, CEO of A&P Tea, one of the U.S.' leading grocery store chains, says that food inflation will increase much more later this year. He says that the high cost of energy and food commodities have not yet been passed on to consumers by manufacturers and grocery stores. He says that food inflation has increased on the wholesale level significantly over the past quarter, and that these higher prices take time to filter through into the retail level. He says that food inflation is going to increase much more. Inflation is ramping up!

Thursday, June 19, 2008

Finally a Stock Market Breakout

After waiting for the past few hours during erratic trading, the stock market has finally broken out higher. This is quite remarkable given the morose mood on Wall Street over the past few days.

Soybeans Surge Higher!

As expected, the grains have surged back. Once corn prices nearly reached limit down, all the grains recovered some of today's losses. However, I didn't expect that soybeans would show greater strength than the other grain futures. Prices haven't reached yesterday's settlement price (yet), but have erased most of today's losses.

Here Comes 'Da Bounce!

Note that we are now seeing a fairly good bounce in the grains with solid volume, lead by corn.

Stock Indexes Go Stale

The Dow is trading within a very tight trading range from 12,000 and 12, 065 today. Volatility is insufficient for reliable and profitable trading. I had early traded stock index futures today, but volatility has declined, and is now too poor for trading. The same holds true for treasuries.

Grains Slide Lower Across the Board

Corn is approaching limit down today, after sliding gradually lower across the board. The limit down price is shown on the left chart as a burgundy-colored dotted line. Soybean and wheat prices have followed suit. Typically, especially in this case in which prices have slowly and gradually declined throughout the session, prices will bounce off the limit price in the opposite direction. I wouldn't be surprised if that occurred today. How much that bounce will be is anyone's guess.

China Announces Rise in Gas Prices, Crude Collapses

Crude oil prices have collapsed due to a major fundamentals-related announcement out of China. The government of China has announced that they will substantially reduce gasoline subsidies that have artificially inflated use of petroleum in the world's most populace nation. China's petroleum consumption has been artificially propped up by the government's subsidizing of gas prices at the pump. Since China's population wasn't paying a market-based price for gasoline, consumption was higher than would have been expected with crude oil at such elevated levels. If China's drivers must now pay a price for gasoline that is closer to the market price, demand destruction should result, reducing global demand for oil.

This has caused the market to react because this will very likely cause rapid demand decay as China's emerging middle class must grapple with much higher gasoline prices. This is an example of the law in futures trading that "anything can happen". We must always be prepared for news that can change the direction of the markets at any time. Phantom refers to these in his book, Phantom's Gift, as shocks to the system. They occur frequently, and we must be ready for them at any time.

Defending the Dow at 12,000

So far Dow bulls have successfully defended the Dow 12,000 level (shown here as a solid yellow line) as a benchmark for maintaining a semblance of the stock market showing some signs of recovery. The stock market has been on a fairly stead downtrend since the unemployment report showed an increase two weeks ago. Thus far, the daily chart (not shown) has shown closes above the 12000 level. However, if the Dow closes below 12000, and then confirms within the next day or two by moving below the daily low price of the day that closed below Dow 12000, stronger selling in the stock markets will likely ensue. In addition, the S&P 500 index futures have closed below the important 1340 level twice within the past week, but just barely. Each time, prices have moved above that level and closed there the following day. These two levels -- the Dow at 12,000 and the S&P 500 at 1,340 -- are both key technical levels to watch closely.

Grains Looking Soggy (No Pun Intended)

Grains trading overnight has shown the entire grain complex to be weak. This may seem surprising, given the flooding in the Midwest and the danger of additional levees breaking, which would cause even more flooding than has occurred so far, and should logically drive prices higher. However, much of the higher pricing for corn and other grain product has been priced into the market. Thus, any improvement in weather conditions may cause prices to move lower, mostly from lack of new demand.

If Speculators Were Driving Crude Higher, This Wouldn't Be Happening

Today's spike in crude oil isn't driven by speculators. It is largely driven by geopolitical concerns and violence in Nigeria. However, those who claim that speculators are driving commodity prices higher don't have the facts or the data on their side. They are just claims. Just their opinion, nothing more.
This chart is proof. Tomorrow, the July '08 crude oil contract expires, and speculators, in order to avoid taking physical delivery of 42,000 gallons per contract of crude oil, must liquidate their positions. They have to. They have no choice. They must sell either today or before the end of the day tomorrow.

This presents a very big problem for those who make such claims. Why? Because if speculators are driving the price of oil higher, then between today and tomorrow, they must off-set their long trade with a short one. Again, they have no choice. With so many speculative traders selling and running for the exits at once, all those sold contracts should drive down the price very sharply. Instead, prices are rising much higher still.

This suggests that some very forceful and large buyers are stepping into the market to buy for the purpose of taking physical delivery of that crude oil. It would be foolish for speculators, especially a large fund, to buy just one day before they would have to take physical delivery.

Only hedgers and commercials would buy in the closing hours of the contract, because they must take delivery at the end of the day tomorrow. And these market participants, by definition, are not speculators. This rapid rise of prices near contract expiration is proof that it is not speculators that are driving the price of crude oil.

Wednesday, June 18, 2008

Sugar in Uptrend

Cocoa Cost More

Confused? Perhaps You Should Be

Real estate magnate Richard LeFrac recently said, "If you're not confused, you're not thinking clearly". At first, I laughed when I heard that. Then, I realized how true his statement really is.

We are constantly bombarded with data, much of which is conflicting in nature. We must analyze and weigh all the data, and eventually, make a decision. Sometimes those decisions prove wrong. Hopefully, there will be more right decisions than wrong ones, or at least the right decisions will be more profitable, while the wrong ones will be small. I have found that this is the more frequent scenario -- small, frequent wrong decisions, and large, less frequent good decisions.

This is a time in which the investment world is experiencing great turmoil. The market can, and often does, turn on a dime. I have also noticed that tops and bottoms -- reversal points -- often occur precisely at the time that we least expect them. Reversals most frequently occur when market sentiment feels like a reversal is the least likely event . It often feels like a continuation of the existing trend is most likely, and yet a reversal at a top or bottom occurs instead. I have also noticed that following parabolic, sharp movements or trends, a sharp reversal is also more likely, as markets become grossly overbought or oversold, like a rubber band that snaps back sharply after being stretched too tight. In Philippe Cahen's book, Technical Analysis and Volatility, this is called the Australia pattern. I have no idea why. On the other hand, if a trend occurs on a more gradual basis, it typically will last longer and is more likely to end with a consolidation rather than a reversal.

I have come to expect market turmoil and uncertainty. Making decisions -- and investments -- in those times of uncertainty are often the best investments I've made. That's why I learned technical analysis. It allows me to make decisions based upon a set of indicators that permit me to remove most -- not all -- emotion from my investments.

Tuesday, June 17, 2008

PPI Inflation 7.2%

PPI continues to increase inflation concerns, but with the CPI last week appearing relatively tame, stock index futures are ignoring the inflation data and moving higher. We need to keep in mind, however, that producer prices take 6-9 months to reflect in the CPI. Thus, the worst inflation may be yet to come.

I have noticed over time that stock traders like inflation because it create the illusion of prosperity, and the corporations don't need to do anything to earn that illusion. It drives the stock market higher, and no one cares. Stock price inflation is not only accepted. It's welcomed!

Approved: NYMEX and CME to Merge

This gets me very excited. The U.S. Justice Department approved -- without conditions -- the merger plans of the NYMEX and the CME Group. I hope that they will do they customers a service and merge the fee structures as well. Between them, traders are paying 4 different fees for data. I wouldn't mind a little higher fee, but come on, guys! Let's combine it all into just one fee for data instead of all these hold-overs from an earlier era when there were several exchanges.

Overall, the futures market has been very well served by these exchanges, which have worked exceptionally well. Costs have been kept reasonable, and service has been excellent. The CFTC is one of the few Federal agencies that have served its community well without high costs or onerous regulation.

Grains: Just Not That Bad

The USDA crop report was not as bad as futures traders had priced into the market for crop destruction due to rain and flooding. It will be interesting to see if there is a bearish backlash when markets open later this morning. The uncertainty reflected in these charts suggest that grains may have a mixed to lower opening.



Monday, June 16, 2008

Grains Stagnant Before USDA Report

After rising sharply last night, grains have stagnated across the board in the day session. Since the USDA will issue a report this afternoon (after market close) detailing the damage done to U.S. grain crops due to the rainy weather and flooding, many traders are sitting on the sidelines, waiting for more news this afternoon.

Crude Oil Plunges, Stocks Take Off

Wow! What a stunning reversal! If I hadn't seen it, I wouldn't have believed it! After reaching a new all-time record price, crude oil has sold off more than $6 today so far. See the crude oil plunge above, and the S&P chart below.

S&P 500

New Crude Oil Record, Stocks Plunge

Obviously, we have realized in the past few weeks that the price of crude oil and stock indexes have become inversely related. Crude oil has now reached nearly $140/barrel.

Cotton: Limit UP