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Check Out Our Featured Blog Posts!
What is a Trend Line?
by Brian Cullen
A trend line is an upward or downward sloping line on a chart indicating movements of prices over a period of time, generally occurring after two or more points of resistance or support. …
To read this blog post in its entirety, click here.
Technically Speaking: Markets You Should be Watching Right Now - August 03, 2011
by Brian Cullen
October Natural Gas. Buying on a retracement move back to the upside. Consider buying off of strong support using …
To read this blog post in its entirety, click here.
Know Your Limits – Daily Trading Limits Explained
by John Payne
There are some pretty significant differences between the futures markets and the equities markets. The first big difference is the trading hours: the futures markets trade 23 hours a day for most markets …
To read this blog post in its entirety, click here.
Futures Option Spreads: Why Should You Use Debit or Credit Spreads?
by Drew Wilkins
One of the main questions I receive as a broker after presenting a futures option spread to a client is, “Why?” Traders want to know why they should be entering an option spread as opposed to purchasing …
To read this blog post in its entirety, click here.
Is Option Selling the “Write” Strategy For You?
by Jeff Coglianese
Options, by definition, are a wasting asset. Many first-time option investors learn this fact the hard way by watching their option contracts expire worthless. It is frustrating to have a call option expire …
To read this blog post in its entirety, click here.
Ask an Expert
by Scott Hoffman
Merv from Nebraska asks: Why are the technicals followed more than the fundamentals? Scott Responds: …
To read this blog post in its entirety, click here.
The Debt Ceiling: What if the Worst Happens
by John Ryan
The story that dominates the headlines these days is the debt ceiling. As negotiations in Congress go on, fear that a compromise may not be reached grows, despite the fact that most analysts are confident …
To read this blog post in its entirety, click here.
Mini-POWER: Discover the Benefits of Smaller Contracts
by Brian Cullen
Virtually everyone involved in the futures markets has heard of the iconic E-Mini S&P. Launched in September of 1997, it has had a stratospheric rise in popularity, and many new traders can’t even conceive …
To read this blog post in its entirety, click here.
Long Option Strangles: Another Play on Potential Volatility
by Drew Wilkins
All too often I hear about traders missing “The Big Move” because they fear losing money in a volatile market. This is a very real fear and one to be respected. However, if the traders had known about long …
To read this blog post in its entirety, click here.
The Insights of Swing Trading
by Scott Hoffman
Telltale Questions of “Deer in the Headlights” Trading Moments. As a futures trader, have you ever asked yourself any of the following questions? …
To read this blog post in its entirety, click here.
We value your feedback and comments. Please feel free to comment on these posts and view and comment on other dt Futures Trading Blog posts.
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Commodity Outlook
US Consumer and Investor Sentiment Injured for Most of August?
In our last issue we predicted a further slowing of the US economy before a transition to a better 2nd half of 2011. However, the stalled US debt ceiling debate that was eventually pushed out to the brink of the August 2nd deadline has probably left US consumer and investor sentiment injured for most of August.
Given the ongoing political divide, it is even possible that sentiment will continue to be affected well into September. In looking back at a chart of US Consumer Confidence, it is clear that it was dramatically undermined by the Japanese natural disaster. While we don't think the US debt crisis created as much raw fear and anxiety, we do think it added to the softening of the US economy. We might also suggest that the divided political arena in the US could ultimately cause US consumer confidence fall more than it did from the Japanese earthquake.
In looking at the historic rally in gold, it is clear that the most recent wave of anxiety was indeed very significant. This is another indicator of the collateral damage done to the US economy. Furthermore, with independent and foreign-based entities advising the US of the need to reduce US spending by $4 trillion and the initial effort from Washington failing to meet even half of that goal, the ability to protect the US from a something similar to the sub- prime crisis has been dramatically reduced. In fact, with both sides of the political battle in the US upset with the debt ceiling extension plan and the anti-spenders promising to battle even more aggressively in the future, it is clear that a major portion of the US populace, government and media have yet to grasp the reality that US government spending is going to come down.
With US economic numbers softening, the US Fed thought to be on hold and the US government "probably" limited in its ability to offer stimulus programs through the end of the year, it could be very difficult to throw off a generally bearish macroeconomic track for the weeks ahead. Expectations of slack US data points have recently had little impact on members of the Fed, with some members steadfastly holding against additional quantitative easing efforts. Certainly the US economy could somehow gather itself and temper macroeconomic fears, but we think that is unlikely until the negative environment of July and early August works through the closely watched US numbers. About the only thing that could alter our negative 3-4 week economic outlook would be a surprise "grand deal" from the super committee, if it were to find the necessary spending cuts from programs that don't have broad political support.
Therefore we expect to see weakness prevail in US equities, energy prices, sugar, platinum, copper, cocoa and other physical commodity markets that lack the internal fundamental fortitude necessary to stand up against a quasi- deflationary environment ahead. Some markets like corn and hogs appear to have the fundamentals to stand up to some outside market pressure, but it is also possible that weakness in the US Dollar will provide some underpin for physical commodities in the weeks ahead. While Euro zone debt fears have seemingly become entrenched, the capacity to cushion the dollar against its own problems is limited. Therefore, it is possible that further economic weakness in the US economy and the still unresolved nature of the US debt battle will likely leave the dollar in a downward track. Some traders even suggest that interest rate differentials between the US and the euro zone are such that the dollar will remain under pressure from that angle, and that in turn could serve to support certain physical commodity markets.
Keep a pulse on the industry and access more commodity news.
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Markets to Watch
Corn and Soybeans
Grain markets are up for grabs, as the market is attempting to absorb the impact of record high overnight temperatures for many Midwest corn fields during pollination (which is bad for yields), ample subsoil moisture for July and a jump in rain amounts for the first few weeks of August. If corn yields are down sharply, feed usage for meal and wheat will pick up significantly as corn prices move up high enough to ration demand.
There is a strong correlation between high temperatures in July and below trendline corn yields. Iowa temperatures in July were the highest since 1955, and likely more importantly, nighttime average lows were the highest since 1936. This data suggests a significant decline in yield is possible for this year for the Midwest crop. Fringe-area crops are also in question. In addition, a lack of moisture in the southern part of the Midwest may have impacted yield right up to the August 4th-5th rain event. These rains might mark a shift in the weather pattern back to normal to above normal precipitation and normal temperatures that is expected for the next 2-3 weeks. On top of the yield issues, traders expect to see a significant drop in harvested acres from the July USDA estimate, as significant losses occurred due to flooding along the Missouri river in early July and the devastating drought in the southern plains.
The damage to the corn crop may be permanent, but the soybean crop could recover if we see normal weather in August. This situation could be somewhat similar to the 2002 growing season and nearly opposite of 2003. July weather in 2002 was harsh enough to impact corn yields, but weather improved in August to spark a recovery in soybean yields. In that year, corn saw yield fall 6.3% from the previous year. Soybean crop conditions were just 42% good to excellent by early August that year, but conditions actually improved to near 46% good to excellent during by the end of the month, and soybean yields fell just 4% from the previous year. In 2003, the opposite weather scenario occurred. July weather was favorable, and at the end of the month, corn crop conditions were rated 66% good to excellent. Even though conditions fell to about 46% good to excellent by the end of August, corn yield jumped 10% from the previous year to a record high. For soybeans, however, poor weather in August hit the crop during a critical time, and soybean yield dropped 10.7% from the previous year.
The point of this exercise is to illustrate that crop conditions can be deceiving for both corn and soybeans and that weather and the change in crop conditions during July for corn and during August for soybeans can be the key to how yields fare. In late July, there was talk of the average corn yield coming in near the 155-156 level, but harvested acre loss plus pollination problems suggest that it could be closer to 150. If we were to assume a yield similar to last year at 152.8 and demand numbers unchanged from the July USDA report, ending stocks would slip to just 373 million bushels with a stocks/usage of 2.8%, both record lows.
Some early trade estimates for soybean yield are showing a drop of 1 bushel/acre from the current USDA estimate of 43.4. If this happens and demand numbers are left unchanged, ending stocks for the 2011/12 season would slip to just 100 million bushels and the stocks/usage ratio to 3.1%. This would be the lowest ending stocks figure since 1972 and the lowest stocks/usage on record (back to at least 1964). However, if actual yield comes in 1% above the current USDA estimate, ending stocks would climb above 200 million bushels and the stocks/usage ratio could reach 6.3%.
On top of the yield issues in the US, China's corn yield will also be important this year, as they are shifting from being a corn exporter to being a major importer. China produces five times as much pork as the US, and they are in the process of expanding and modernizing their pork industry. As a result, we expect to see a surge in corn demand by China if their crop is not as high as the current USDA estimate, which calls for a record-high 178 million tonnes. If that estimate is off by 5% and China needs to import the difference, they could be in the market for close to 350 million bushels.
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Cocoa Strategies
With some resolution to the US debt ceiling debate, many of the futures markets
are shifting their focus back to sluggish US economic conditions. During the
rest of the summer, deteriorating market sentiment could end up having a big
negative impact on US consumer demand. Although a weaker Dollar may result from
these conditions, overseas risk concerns are likely to create choppy and
volatile action in the near future. There are some commodity markets that will
be able to overcome weak economic conditions due to their bullish supply/demand
situation, but other commodities that already have bearish fundamentals are more
likely to have negative price action during the near future. One of those is
cocoa.
The cocoa market rose to a multi-decade high earlier this year as a direct
result of the Ivory Coast cocoa export ban. When the ban was lifted in April,
more than 450,000 tonnes of cocoa stored at Ivory Coast port facilities became
available for shipment. Ivory Coast cocoa production this season has been widely
projected to be more than 1.5 million tonnes, a new record crop despite the
recent political turmoil. Ghana will have cocoa production above 1 million
tonnes this season, far above their previous record. This large amount of West
African cocoa will be mostly directed towards sluggish economies in North
America and Europe. Given this sort of negative supply/demand outlook, a near-
term rebound for December cocoa could prove to be a significant opportunity to
enter the short side of the market, as a new low for 2011 is likely to occur.
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Sugar Strategies
The sugar market is showing more and more signs that a major top is in place. A long period of profitable price levels, a strong recovery in India sugar production for the second year in a row after the disastrous crop in 2009/10, a strong recovery for sugar production in the Black Sea region after the drought last year, a jump in European Union sugar production this season, and the outlook for another bumper crop this season in Thailand after a record crop last year are all supply issues that need to be absorbed in the next few months. Concerns that the Brazilian production this season will come in well below last year, compounded by their slow start, helped drive the markets to a contract high on July 25th. However, the fact that the market had a lower close for the week after reaching a contract high helped spark the start of a long liquidation trend. A weekly reversal from a contract high is often seen as a sign that a major top is in place.
The slow start to Brazil's production season was a concern for the market, but it is important to keep it in perspective. Last year's production was a record high, so this year's pace is slow by comparison. On top of that, beginning stocks this season were extremely tight. This led to an active speculative buying spree and high open interest as the market approached its July peak.
There will still probably be a significant world production surplus for the 2011/12 season, and the high price this year will continue to attract increased plantings for next year. Concerns over reduced global growth this season, weaker energy prices and fewer global weather issues are seen as negative factors. A big crop in Europe and the Black Sea region may help ease the short-term tightness in the market. Ukraine's white sugar production this year is expected to reach 2.2 million tonnes, up from 1.55 million last year. Russia could see a large crop as well, which means less import demand. India may be in a position to export this year, depending on its yield.
The Commitments of Traders reports as of July 26th showed non-commercial traders were net long 194,532 contracts. Non-commercial and nonreportable traders combined held a net long position of 220,869 contracts. The hefty net long position suggests the market is vulnerable to long liquidation selling pressures if support levels are violated. We have seen plenty of support violated since July 26th.
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Cattle Strategies
Short-term negative supply and demand factors continue to mount for the cattle market, while the longer-term factors continue to improve. Drought in the southern plains only encourages the movement of cows and non-fed cattle to slaughter, due to a lack of decent pasture and range conditions. Hotter than normal weather in July across the country also dented consumer demand, which helped seed beef prices to their lowest leel since mid-June. However, October cattle are still holding a stiff premium to the cash market. With high-priced corn, cattle placements could be slow in the next few months, and this will keep beef production slow into the first quarter of 2012. The USDA already projects one of the largest declines in beef production ever between from the 4th quater of 2011 and the 1st quarter of 2012, as well as a sharp drop in production from the 1st quarter of 2011. The short-term fundamentals would argue that this situation will oly intesify. In other words, October may be too expensive and February too cheap.
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***This report includes information from sources believed to be reliable and accurate as of the date of this publication, but no independent verification has been made and we do not guarantee its accuracy or completeness. Opinions expressed are subject to change without notice. This report should not be construed as a request to engage in any transaction involving the purchase or sale of a futures contract and/or commodity option thereon. The risk of loss in trading futures contracts or commodity options can be substantial, and investors should carefully consider the inherent risks of such an investment in light of their financial condition. Any reproduction or retransmission of this report without the express written consent of The Hightower Report is strictly prohibited.
Discuss Trading Strategies with Us!
If you'd like to discuss trade strategies to determine the best execution strategy for you regarding the market, contact us or call us toll free at +1.800.800.3840.
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| In This Issue |
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| Trading Tip |
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Don’t be afraid to be a sheep.
Follow the trends. This is probably some of the hardest advice for a trader to follow because the personality of the typical futures trader is not “one of the crowd.” Futures traders (and futures brokers) are highly individualistic; the markets seem to attract those who are. Very simply, it takes a special kind of person, not “one of the crowd,” to earn enough risk capital to get involved in the futures markets. So the typical trader and the typical broker must guard against their natural instincts to be highly individualistic, to buck the crowd.
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| Did You Know? |
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Daniels Trading has a multitude of archived webinars covering various topics and trading strategies in the markets.
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