Bean Market Fear Shifts From Producer to Consumer

The soybean market has been held just under $15 per bushel since 2012’s US harvest. In fact, it traded all the way down to $11.50 last august before rallying through the harvest. Soybeans are up around 15% so far this year and based on a few factors, it appears that this rally could sustain itself. Currently, the market is sitting about where it is supposed to be; in a period of consolidation near the highs waiting to fall once the spring planting becomes more certain. I’m just not sure how much of a buying opportunity we’re going to get come the late June – July seasonal sell-off.

Fundamentally, ending soybean stocks have been reduced once again by the World Agriculture Board. Current estimates leave 130 million bushels in the bins, which is a reduction of 5 million bushels from their April report. This leaves ending stocks at 3.8% or, a 14-day supply on the market. This is a record low stocks to usage ratio beating out 2012-2013’s tightness by a hair. The scary part about this is that the continued tightness in the soybean market comes on the backs of fantastic production years. The US has produced an average of more than 3.2 billion bushels over the last five years. Going back to 1960, there are only three other individual years in which US production exceeded 3 billion bushels. Global demand continues drive prices higher as more people from more countries westernize their economies and diets.

Some of the supply tightness is expected to be covered by this year’s plantings. Current estimates suggest that the US will plant 81.5 million acres this summer. This would set a new record for planted soybean acres. Working out the math at an average yield of 45 bushels per acre puts us at better than 3.6 billion bushels produced. That would set a new production record, surpassing 2009’s 3.36 billion bushels. It’s important to remember that these are projections. The reality of this year’s harvest could be significantly different as the odds grow on this becoming an, “el nino” event.

The current forecasts for 2014 becoming an el nino event continue to climb. The National Oceanic and Atmospheric Administration (NOAA) have increased their prediction certainty to 65%. However, I’ve read private reports that are expecting an el nino occurrence with an 80% degree of certainty. A couple of el nino issues need to be sorted out. First, its impact on this year’s crops is usually limited to harvest time – not planting season. Secondly, it could bring more rainfall and cooler temperatures to the Southeast and into Texas, where it’s desperately needed. Finally, California’s San Joaquin valley where it’s also desperately needed as they’re expecting leave nearly half a million acres fallow this summer. El nino is hoped for, rather than feared in many areas this year.

That being said, it’s also important to note that the current el nino predictions are being modeled after the 1996 and 2001 el nino events. The soybean futures’ trading pattern in these two years could not look more different. The 1997 event led to exceptionally high prices for old stock beans, which rallied nearly 30% by early May. Meanwhile, new crop, November beans for 1997 remained relatively stable in price before rallying as usual into the harvest period. The 2001 scenario saw the market decline by more than 15% through the spring before rallying the rest of the year, eventually climbing more than 30% from their spring lows.

The interesting thing about this year’s setup is the way the commercial traders are treating the market. Typically, we start seeing commercial traders sell into the pre-planting rally as they try to capture quality pre planting hedge prices. This year, we’re seeing an onslaught of commercial buying. This seems to be happening more regularly and may be their new trading pattern, which you can see on this chart. We’ve seen strong commercial buying in 9 out of the last 12 weeks with net purchases of more than 100,000 bushels. We saw this type of action in 2011 and while it was a choppy ride, the market held and made new highs in early September before falling post harvest. We also saw this early last year and it led to another $1 per bushel rally into mid-summer. It appears that we’re seeing a shift from supply side forward hedging of crops by producers to predominantly demand based hedging by end users attempting lock in pre planting prices rather than waiting and hoping for a post-harvest sell off.

The issues facing this year’s soybean crop are not only varied in their nature but also add a huge wildcard to their potential impact. We can be fairly certain of the global demand numbers. I don’t think people will be any less hungry this year. The US supply is expecting to set a record but, it has to just to offset the declining current stocks. The el nino while growing in the certainty of its development has still provided few clues as to its strength. A benign effect could leave the world with huge harvests, as the summer is cooler and wetter than usual. However, some are comparing it to 1997 when el nino effects claimed more than 2,000 lives and caused more than $30 billion worth of global damage. Given all of the variables in play, it appears particularly important that the net commercial position is betting on higher prices by harvest.

How to Use Volume Oscillators and Trend Indicators to Make You Money

You should never make a trade based only on a trend indicator. The Volume Oscillator (VO) is another indicator that will help you determine whether a trend is breaking support or resistance. In essence, the old saying is true: without volume there is no price movement and without price movement there is no volume. Use that old saying to your advantage.

Several oscillators like the Percentage Volume Oscillator (PVO) and the Market Volume Oscillator (MVO) and are based on the VO.

The VO calculation is based on two Volume Moving Averages (VMAs). The base of calculation is simple:

VO = [Fast VMA] / [Slow VMA]

The Fast VMA is short term moving average, and the Slow VMA is a long term moving average.

If we use set a VO (5, 20) as an example, the setting would be the Fast VMA to 5 bars and the Slow VMA ito 20 bars. At 5 bars, the Fast VMA is the shorter period and, at 20 bars, the Slow VMA is the longer period.

In essence, the VO calculates the difference between 2 VMAs. This calculation reveals surges in volume and possible abnormal volume activity. The VO tell us where the current volume is in relationship to the average volume over a longer period of time.

If we take a look at the VO setting above, that means that when the VO is over 1 then the Fast VMA is over the Slow MVA and we can conclude that the volume activity in the market is higher than usual. In other words, we can conclude that there is an unusual volume surge based on the parameters we set (5,20).

By knowing how the basis of calculation works in the VO, the indicator becomes a very effective tool in your trading. You should never solely rely on trend based technical indicators. By doing so, you will only see one half of the total picture and it will lead to more losses than wins. When you combine your trend indicators with an oscillator like the VO, you will be able to distinguish whether the changes in the trend are based on abnormal volume activity and make a better decision as to whether to enter a trade.

A final thought is that you should consider a break in support combined with unusual volume activity as panic selling and the opposite is true with a break of resistance with an unusual volume surge which should be considered as greedy buying.

The Only Level Playing Field in Investing – Options

I learned options late in life, accidentally, trawling the pages of the ancient magazine Exchange and Mart in 1995. A full page article showed how an options trader could work from home, (actually in bed) using prices from the BBC’s teletext, back in the day. A lot has changed, but options have been around for centuries-pre-dating shares, being used for pricing ships’ cargoes. In the 1980s options became exchange traded, and fortunes were made. Warren Buffett is a keen options trader, Nassim Taleb was the most prolific. They are not idiots and neither are you if you have read thus far.

Investing is the word we use for a trade that went wrong! Investing is mostly passive and requires you to be right and/or to tuck your stocks away for decades. With markets hitting new highs and valuations stretched, you have to realise the stock market cannot keep going up. If you are happy with paltry dividends and the certainty that your stock will at some point in the future be worth half what it is today, then read no further. QE is no longer on the table and that is all that has separated stocks from realistic valuations.

So what are options all about? In our world we only trade the FTSE100 options. Why? Because the entire index is unlikely to get arrested for fraud/sexual harassment/bogus accounting/toxic products, and all the other nasties that can destroy a company’s rep in a heartbeat. So FTSE is the underlying on which our derivatives are based. Options are the right to buy or sell the underlying (priced by the exchange at £10 per point cash settled) but NOT the obligation. In the same way as insurance companies collect premiums, however, options can be sold. Did you ever see a poor insurance company? When you get it right, selling options can bring you a monthly income stream of a comfortable 2% per month, consistently. Nothing else comes close.

So who are the buyers of options if everybody sells them? Well that is the biggest part of education, and the reason I have traded profitably since 1999. Yes I have had failures, and panics- but I made nice profits in February while the market dropped 10%, despite being a bit dim! I learned about options from an expensive course and from much of the free training on the internet. A while ago I met a like-minded options trader, he runs the website to which I contribute every week, with a real trade, and general tittle tattle about our world. It’s utterly mind-blowing when you start to understand options and the endless combinations, and 20 or more strategies that we use. I love options trading and I want to reach those with a pot of cash who seek income, and a sensible method with risk management, but who don’t know where to start. We are not just about newbies though-there are insights for all. And… we don’t want your money.

Trading Ukraine Uncertainty

Removing the politics of the Russia-Ukraine issue and focusing on the economic implications of Russia’s bloodless annexation of the Crimean peninsula puts some trading opportunities on the table as global risk premiums jump. In order to do this, a couple of suppositions must be declared. First and most importantly, the United States will not actively engage Russian troops. In many ways, this is a replay of the Georgian conflict in 2008. Georgia was in revolt against Russia and wanted closer ties to the European Union and the US. Their cause was quickly championed by Western leaders until it became obvious that neither the European Union, The United States nor, NATO would take any military action to defend Georgia against Russia. This episode set the precedent for the current situation.

The current situation in the Crimean peninsula is far more important to Russia economically, militarily and humanitarianly. Therefore, the knee jerk reaction by our government to defend Ukraine’s sovereignty against the oppressive forces of communism is simply hyperbole. In poker terms, Vladimir Putin couldn’t call the Secretary of State, John Kerry’s “All in,” fast enough. Putin knew it was a bluff and now sits as the chip leader in the biggest game of Texas hold ’em since the Cold War. Putin is betting that the European Union, NATO and the US will acquiesce to an unstated and unwritten reclamation of the Crimean Peninsula.

The anticipated inaction should resolve to a business as usual approach going forward. This will allow the Ukraine to continue its exportation of corn and wheat, where globally it ranks second and sixth, respectively to the rest of Europe. Therefore, the recent run-up in prices should be viewed as a selling opportunity because both the fundamentals and the commercial trader position strongly suggested that prices in these two markets were already too high. Here are the corn and wheat commercial trader setups. This situation is very similar to spikes in crude oil during Middle East times of crisis.

Every market has a built in fear based reaction. In the case of crude oil and agriculture, the built in reaction to fear is higher prices. Conversely, the built in fear in the stock and currency markets is downward. The Russian stock market has sold off nearly 10% as a result of Putin’s actions. The decline is based on two primary factors. First of all, the largest companies in the MICEX (Russia’s equivalent of the S&P500) are energy companies who would be hurt tremendously by global sanctions and limiting natural gas shipments through Ukrainian pipelines. Secondly, Russia’s economy has slowed considerably over the last two years with GDP falling from more than 7% to less than 2%, currently. Finally, the Russian Ruble has fallen by more than 10% in the last two months as their escalating costs and declining productivity hamper future growth prospects, anyways.

The media makes money by selling advertising. Hype generates attention. Attention generates advertising dollars. Thus, we are inundated by over hyped speculation of what COULD happen with little regard to what is MOST LIKELY to happen. The most likely thing to happen isn’t dramatic at all, which makes for poor headlines. The most likely thing to happen is that business will continue to operate roughly as usual which is most likely to cause the markets to revert to their means as longer term fundamentals that were already in play continue to work through the system.

Stock Index Futures Expiration Tendencies

Commercial traders in the stock index futures behave quite differently than the Index traders or, small speculators who act as their counterparts. Collectively, this is perfectly logical. Index traders are positive feedback traders. Positive feedback traders add on to their bullish positions as the market climbs and scale out of their bullish positions as the market declines. This keeps their portfolio balanced to their available cash resources. This also places them on the side most likely to buy the highs and sell the lows. Typical trend following. Small speculators are a sentiment wild card. Their position is more price and sentiment based than anything else. The randomness of their sentiment makes their positions too yielding to lean on.

Commercial traders, on the other hand are negative feedback traders. Their strategy is a mean reversion, value based methodology. Collectively, their models tell them what price is, “fair.” The higher the market gets above their fair value, the more they sell. Conversely, the more the market falls below their fair value, the more they buy. Their direct actions typically trace out the meanderings of a wandering market placing their sell signals atop the market’s intermediate rallies and their buy signals below the intermediate lows.

There are two other aspects of commercial traders’ habits that must be examined before we approach the current outlook. Commercial traders use the stock index futures to hedge their equity portfolios. Their ability to sell short the stock index futures provides them with easily implemented downward protection against a decline in their equity portfolio. Furthermore, direct short sales in the stock index futures avoids the uptick short sale rules in equities along with the avoidance of accounting for capital, gains or losses as well as any changes in basis. This aspect of their behavior is observed by the varied but consistent, slightly negative correlation between the commercial net position and the underlying market.

The second aspect of commercial usage of the stock index futures is their implementation of options and the corresponding trades this forces them to execute in the stock index futures. Just as commercial traders maintain a slight short bias in the futures to protect against equity declines, commercial traders also sell upside calls in the options market in order to collect the premium and lock in some short-term gains. Selling call options creates an instant credit in the trader’s account but similar to unearned income this cash is actually a liability whose profit is realized over the course of time. The short call option creates a net short position in the futures market. Commercial traders use the markets’ declines to jump in and buy enough futures to offset the upside liability created by the short call options thus, locking in the added alpha they collected upon the initiation of the short call option position.

Now that the basics are out of the way, let’s look at how this plays into the current market situation. Three out of the last four quarterly futures and option expirations have seen some very specific trading behavior by the commercial traders. Better yet, it’s been easily traceable as you can see on this S&P 500 futures chart (for the chart ). The market starts acting up around a month prior to expiration. That places us about a week out from the beginning of what I’m expecting from the June expiration and the June pattern has been the most consistent occurring in each of the last five years.

The pattern plays out with commercial traders pressing the market lower about 20-30 days prior to expiration. This decline accomplishes several tasks. First of all, it washes out the weak small speculative long position. Second, it’s far enough to force index sellers to lay off part of their portfolio. Finally, its far enough for the commercial traders to cover their direct short hedges as well as allowing them to get futures bought against their short call option positions at a discount. This buying has been enough to run the market straight back up to the highs and create a new churning pattern of consolidation at the highs leading into expiration.

This leaves the market sitting near the highs again and creates the same scenario of index buying and small spec buying that helps grind the market higher, yet again. It’s clear the way this has played out over the last few years that the commercial traders are in fact the only beneficiaries of these late quarterly cycle gyrations. However, it’s also clear that their footprints are easy to track including one of our recent pieces, “Commercial Traders Own the Stock Market Gyrations.” While we feel this is true most of the time, we feel far more certain given our current place in the stock index futures’ quarterly expiration cycle.

This material has been prepared by a sales or trading employee or agent of Commodity & Derivative Advisors and is, or is in the nature of, a solicitation. This material is not a research report prepared by Commodity & Derivative Advisors’ Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.

Here’s What Happened the Last Time the US Applied Steel Tariffs

While Donal Trump says “Trade wars are good, and easy to win,” history suggests otherwise. In March 2002, George Bush gave into lobbyists and slapped on steel tariffs of between 8% and 30% on imported steel. At that time, Bush exempted Canada, and Mexico because of NAFTA, plus a few developing countries.

Immediately after those tariffs were applied, the S&P 500 dropped over 33% over the next seven months.

Trump is demonstrating that he is no more astute than Bush was, assuming that a trade war is a ‘good thing’. Every time a country applies protectionist policies, other countries do the same, and the losers are the consumers who end up paying more for the finished products.

Governments always react, never fully understanding the end result. Trying to protect an inefficient industry in your country by applying tariffs against a more productive country does not make the domestic industry more efficient, it just makes the finished products more expensive for your consumers. Tariffs are designed to raise the cost of imported goods. They are nothing more than a tax, and in this case, a tax to be paid by US consumers.

So sure, Trump may succumb to steel lobbyist in the US and apply these tariffs to save 143,000 jobs in the steel industry, but these tariffs will hurt over 6 million other workers in industries like the auto industry that use steel to manufacture their products. The end result is the finished products that use steel or aluminum are going to cost more for consumers. So how is this a ‘good thing?’

For US companies that use steel and aluminum, not only will their costs go up, they will be less competitive, and their exports will suffer. And then of course we will have the problem of reciprocal tariffs that have already been threatened by countries being hit by Trump’s steel and aluminum tariffs. The European Union and Canada have already stated that they will retaliate.

Currencies play a huge role in the cost of imported products. Canada is the biggest exporter of steel to the US. The $CAN is currently trading at 77.50 against the $US, meaning all other things being equal, steel priced in $CAN will be 22.5% cheaper than steel priced in the $US.

While these tariffs may help the bottom line for American steel companies, the real losers will be the US consumers. If this turns into a full- on trade war, there will be many more casualties globally, including investors.