Spread Update and Grain Moves

The LHN9 / LHZ9 spread is clearly taking some heat. The backspreads had worked quite well up until a couple of weeks ago. Now it appears that liquidation of those backspreads is overwhelming. The recommendation was made to initially risk 3 cents, and we're now about half way there. Critical support, in my opinion, comes in around 2.25 on the spread. We basically ended up right on that support at day's end today. So we'll see what the next few days bring. I'd really be surprised to not see a bounce, but this is why risk must be defined entering into a trade.

Wheat harvest is in full swing, thus the inability of wheat to rally today even with soybeans up over 20 cents. Corn was having a hard time rallying on its own with the wheat under pressure. Old crop Soybeans rallied today as if there was still some old-fashioned rationing to be done.

While the hogs struggled today, both live and feeder cattle posted gains. Live cattle are not wasting much time puching up toward the high end of the long-term trading range it has been in. Feeder cattle are encouraged by the recent pull-back in grain prices.

The dollar index broke 100+ points today, and gold followed inversely by rallying $5.50/oz.

We're half way done with a 2-day FOMC meeting, an announcement from which would be expected tomorrow afternoon at around 1:15pm Chicago time. Ahead of which, no portion of the yield curve posted losses today. Eurodollar, 2-yr., 5-yr., 10-yr., & long-bond futures all rallied -- with the farther end of the curve rallying the most.

I've been doing some work to paint a picture of what's been occurring in the shorter-term dated interest rate futures contracts. I'm not sure if the recent rally in rates was a head fake or a shot across the bow. Perhaps you can chime in with an opinion when I post that post.

Good trading, Bob

Follow-Up to Hog Spread

I mentioned a hog spread in the previous blog. I mentioned that the LHZ9 contract vs. the LHN9 contract had widened substantially and that I'd be looking for a pullback to buy. I believe we're there.

Typically this time of year we see the LHN9 holding a 4 to 12 cent premium to LHZ9.

A couple weeks ago this spread was actually at a 4 cent discount, and has since improved to "only" a 3/4 cent premium.

I am thinking that this spread is offering an opportunity to get on in the direction of the prevailing trend. Down.

The strategy is to sell the LHN9 and buy the LHZ9 at a spread price somewhere in the vicinity .75 premium over the December. The initial risk, to me, looks like it should be about 3 cents ($1200). The profit target should be 2 cents and then 4 cents.

If things go according to plan, tighten the stop per your risk tolerance.

Call me with any questions,

Bob 1.800.388.0998 // 1.312.987.2053

Pre-Report Rally or $US Bump?

In the grain and oilseed markets today we experienced some pretty good rallies. Spring and Winter wheat rallied between all three exchanges, as did Corn, Oats, Rice, Soybeans and soy products.

While there may be an argument that wheat popped on short-covering ahead of tomorrow morning's report, I more so think the big break in the $US was the predominant influence today. As I write, the DXU9 is down 188 points on the day  - a pretty good move to the downside. I published the expectations for the USDA numbers due out tomorrow morning, please refer to those when the report comes out.

Cattle & Feeder Cattle had a decent day today. It is encouraging to see the live cattle futures hold at recent trading-range lows. Subject to any negative influence a bullish grain report may have tomorrow, it sure feels like cash cattle has a shot now of trading at even-money with last week at $82 in the South.

Lean Hog futures were mixed. Auggie and Dec. ended lower on the day, July and Oct. ended better. The near-term/deferred spread has widened quite a bit. Indicative, the LHN9/LHZ9 spread topped off at 4.20 the other day.  The breakout to the upside on this spread has been parabolic. It's ripe for a correction. I will not look to sell a high by picking a top, but I will be looking to buy the first decent pullback. In my opinion it looks like there's good support around -70 to -95.

Bob

Grain Report Expectations // Pork Analysis

First order of business ... We'll get the latest set of numbers from the USDA on Wednesday morning with the Monthly Crop Production release. Here are the numbers from May, along with the average guesstimate and trade ranges for the old and new crop ending stocks and winter wheat production forecasts (Courtesy Informa Economics):

http://marketinsight.tradehugger.com/files/610-usda-report4.jpg

Suffice to say, the only category that holds expectations of no decline is the '08/'09 Wheat ending stocks number. All other categories expect some degree of decline in supply.

Today's decidedly bearish close, in my opinion, in the wheat markets bodes for some further selling in the overnight session. I imagine that tomorrow will become reflective of some further "squaring up" before Wednesday's release.

Let's talk about the pork market. Nearby lean hog futures are getting killed. Producers, by some estimates, are losing $18.00/head.  And this is an improvement from earlier in the year. The price of inputs has shot to the upside, and the prices for hogs has fallen.  This is the perfect storm for catastrophe for a pork producer. Those that have the ability to weather this storm will be on some surely solid ground. The expectations for a time frame when recovery may be possible is in the ballpark of Q1 '10. That is just a guess at this point.

I have witnessed some rather significant declines in the 15 years I have been watching and trading these markets. Between the summer of 1997 and winter of 1998, lean hog futures broke from 85 cents/lb. clear down to 22.50 cents. Between summer 2001 and summer 2002, lean hogs broke from 75 cents down to about 30 cents. For the past five years we've seen relative stability as the market has traded in a range of about 55 cents to about 80 cents.

Nothing cures low prices like low prices, and eventually this industry will get through this period of seeming excess capacity respective of the present economic environment. H1N1 shall pass, too, at some point.

Being that we are down toward the low end of the trading range, it is going to be interesting to see if there is a washout to the downside. If so, this could set up a very nice long-term trade.  LHN9 settled at 59.50 today, and LHQ9 settled at 61.52.

I wanted to set the table as to this scenario that is unfolding. I will be back again with more comments as time goes on.

Bob

And Then Some!

After yesterday's spanking that most commodity futures took, many came back today to recover what they'd lost yesterday and then some. Particularly the energies, Soybeans, & Soymeal. many of the commodity futures we watch were able to recover a bulk of yesterday's losses.

Keep an eye on those copper futures. We've broken out to the upside from the triangle I noted a few blogs back. The recent retest of the downtrending line that made up the upper boundary of the triangle, and the ensuing support found there upon yesterday's break, is a good sign of strength and likely continuation.

Keep an eye on those December '09 Lean Hog futures. The near-term contracts have been getting clobbered, pressuring cattle and pork bellies along the way. I think when the negative psychology clears, which may be a ways away yet, the December contract will get a real boost. Check back to my previous hog blog for the option strategy I like.

Talk out of energy circles is that OPEC believes Crude should be at $70-$72ish by year-end. Today the CLN9 traded $69.60. The CLZ9 traded $73.42. We're there. Now what?

Massively important Employment Situation numbers out tomorrow morning bright and early at 7:30 Chicago time. I do not think tomorrow will be a quiet end-of-week day.

Bob

$US Not a Saviour for All Commodities Today

Yesterday, new lows in the June '09 Dollar Index futures helped propel most markets higher. Today, it was not the global crutch to move most commodity futures markets in the same fashion.

In the grains/oilseed sectors: Wheat, Soybean, Meals, and Rice fell back some. Bean oil, Oats, & Corn rallied. Most commentary I read indicates that pullbacks in beans are buying opportunities. We'll see.

Livestock futures are hurting. The pork complex is on a rather obvious downtrend. Higher feed prices are no help, but I still feel that a position on the long side of the LHZ9 should be built using options. The reco I made 'round about the time of the H1N1 hysteria still is in play. The LHZ9 70 Calls are now worth somewhere close to 2 cents, indicating a loss if you paid 3 cents. The thinking that somewhat tight supplies will inevitably be felt, and then priced into the market, is aiding the strategy to average down with another purchase at close to the 2 cent level. Then again at 1 cent if it really begins to accelerate lower. If the market affords the opportunity to average in, the risk would be 6 cents, or $2400.00, and the average price would be 2 cents. The upside targets remain the same for that option, which is around 4 to 4.5 cents.

Cattle futures are on a good downward slide, too.  August Live Cattle futures, for example, have now eked through the bottom end of a long-established trading range. For the past 3.5 to 4 months or so, that contract has basically been in a well-established value area of about 81 to 85 cents. Today it settled at 80.65. I see support coming in at 80.10, and then 78.15.  Eroding cash trade, larger showlists, the dairy cow buy-back program, and heavy competition from competing protein sources such as pork are more than offsetting the expectations for an uptic in demand from the onset of grilling season and cheaper exports credited to the falling $US. I think the range-bound players are going to look to buy this market soon, either by selling puts or buying futures. I may too.

Speaking of cattle, yesterday's slaughter in the interest rate futures was followed by relative stability today. As I write this, ZBM9 is up almost a point and the ZNM9 is up about a third of a point. The short-dated portion of the curve also came back some today, as year-or-so out Libor and Eurodollar futures bounced up about 5 or 8 points. In my opinion, nothing can save these markets from continued downside save for Fed Intervention, downward movement on the equity futures, or friendlier comments out of PRC with respect to US Debt ownership.

I've been watching a few spreads lately that look to be good risk:reward scenarios. I'll come back to you shortly with their details.

Bob

Consumer Confidence Confidence?

The headline economic indicator of the day today, Tuesday, May 26, was the Consumer Confidence number. It came out as follows:

"The Conference Board Consumer Confidence Index™, which had improved considerably in April, posted another large gain in May. The Index now stands at 54.9 (1985=100), up from 40.8 in April. The Present Situation Index increased to 28.9 from 25.5 last month. The Expectations Index rose to 72.3 from 51.0 in April. The Consumer Confidence Survey™ is based on a representative sample of 5,000 U.S. households. The cutoff date for May's preliminary results was May 19th."

Headline-wise, the future looks brighter. The perception of relatively better times ahead is gaining traction, per the Confidence Board's survey.

Per my BBQ survey, I'm not so sure. I haven't trademarked my BBQ survey yet, but I am thinking about it as I think it is a good indicator of the local confidence level. The BBQ survey consists of my personal conversations with friends and family, and new acquaintances, around the Weber BBQ during weekend grilling parties and get-togethers.

Within these groups, there is a pronounced uptic in the number of unemployed or under-employed throughout many different lines of work -- construction, service, import/export industries, etc. Also, there has been at least a report or two of either wage freezes or decreases from some in the same group, concessions forced upon them in order to stay employed.

While it's nice that there appears to be light at the end of the tunnel, it really seems to me that the consumer that exits the tunnel will look markedly different than the one that entered the tunnel. I imagine that a percentage of the workforce will in the future carry on, or fall back to, the same spending habits as before the erosion in the US economy. However, I think that percentage will be fairly small compared to the number who come out of this having changed their habits and ideas on how debt (credit cards, home equity loans, etc.) and herd-mentality speculation (real estate, commodities, etc.)  can deal a crushing blow. Or I guess that I at least hope that the average US consumer learns from what is occuring.

As I post this comment, the SP500 futures are +18.00 on the day, and the Dow futures are +173 points. The Confidence numbers are definitely boosting the market morale. The market is also aided higher, so far, by a dollar that had not returned to decline.

The 200 day SMA, per my chartwork, comes in at 924.30 for the June '09 SP500 futures. A test of that is feasible. A rally and close above that level is the formula for a push to 951.00. A rally and failure to close above it is a formula for a downside objective of 889.00, then 869.00.

Contact me if you have any questions/comments.

Cotton Update & General Commentary

December '09 Cotton (CTZ9) is hovering around where the 200 day MA and the 20 day EMA have converged. This area is roughly 58.90 to 59.20. CTZ9 broke down to 59.12 in the session today, but was able to firm up and close up toward the high end of the range.  The waffling equity markets did not help the rally in CTZ9 as much as the better grain/oilseed and worsening dollar did. So the scenario posed a couple/few blogs ago to buy the dip is working for now.

I do like the trade. I do not like the thinness in the deferred contracts. We'll take this in degrees and look for the following targets to measure strength: 61.07, 61.70, and then new swing highs. Beyond that please refer to the previous blog. The stop should be tightened per your risk tolerance.

Cattle futures are an options-sellers dream come true. A well established range for quite some time. I really don't see too much that will knock the market out of the range near-term, save for a runaway grain market.

Today the soybean market posted a decent correction in the old-crop / new-crop spread of SN9 vs. SX9. That spread today made a high of 168.6, but went out the low of 154.4. Perhaps it will actually see a greater correction back down towards the mid 130's.

A market that is now on my radar is Copper. Fundamentally heavily reliant on continued demand from China for any continued upmove, it has a pretty-looking triangle formation. You can draw your lines where you wish, but take a look:

July '09 Copper Futures Daily Chart

In my opinion, markets tend to break out of such formations in the direction of the prevailing trend. Up, in this case. Yet I have seen the opposite occur, also. I'm going to do a little more research on this market, such as looking for seasonal tendencies and correlations. I'll get back to you when I formulate a strategy.

Contact me with any questions/comments ... Bob  1.312.987.2053 // 1.80.388.0998

Long-term Perspective on New-Crop Soybeans

Let's talk Soybeans. New crop soybeans, which begin with the November futures.

November Soybeans (SX9) have rallied about $2.00/bushel since the beginning of March. Most of this rally, in my opinion, has been due to the effects on old-crop Soybeans caused by decreased supply out of Argentina and hence, increased demand for US soybeans from such sources as China. As old-crop has rallied, so has new crop. Though not to the same extent as old-crop, evidenced in the widening spread of SN9 vs. SX9.

Ok, projected ending stocks for the '08-'09 crop year are thin, no doubt. As the top-line number for supply for the '09-'10 crop year, we'll be beginning the new crop year without much room for error when it comes to production. Given.

One variable that has been taken care of so far is the seed quality. Mr. Trey Koger, soybean specialist with the Mississippi State University Extension Service, was recently quoted in a trade magazine as saying "Overall seed quality for this year's crop is outstanding." (Cotton Farming, May 2009, One Grower Publishing, LLC) The article continues on to say that germination rates and vigor are excellent. So, it appears that the crop should be off to as good a start as might be hoped for by a producer.

Hence, my thoughts are to look for a shorting opportunity in this souped-up market. First let's look at the seasonal tendency:

This graphic is a little messy, but bottom-line it appears that there are about three rallies and pull-backs into July - and then a considerable break. The more-recent 5-yr. pattern shows a more stable upswing beginning April and ending July.

But where might the ultimate upswing end? Good question. I don't know. But here's what I see as potential zones for the market to fall from:

The top graphic is a daily of SX9. There's a chance the SX9 could stop here at the 200MA, around $9.85ish. It may also stop a little bit higher at the January highs of $10.45ish.

The "shoot for the stars" number is found in the lower graphic. Similar to the CTZ9 chart I posted recently, the SX9 has formed a W bottom. If it plays out according to the textbooks, the upside target in my opinion comes in around the $12.80 area.

So what am I saying? Do I think I can get away with giving you a $3.00 range for a high in SX9 and then tell you to get short at your own risk? No. What I am doing is laying a foundation for a thought process that has a long-term short bias in this presently bullish market. This market, as had the Cotton market on the upside, is on my radar. Now it's on your's, too. I'll keep you updated on my thoughts about it as time goes on, and you'll be the second to know as soon as I think the timing is right to act.

Contact me if you have any questions or wish to open an account to put into practice some of the things I discuss.

Bob // 1.800.388.0998 // 1.312.987.2053

OI in SP Options & Cotton Strategy

Upon reviewing the Daily Bulletin for the Emini-SP500 options, in my opinion the bulk of Open Interest for the July options expiring this Friday is at the 900 strike. See the excerpts of the bulletins below:

December '09 Cotton futures have been on a tear to the upside and now is finally showing signs of a possible retracement. If so, this will set up a momentum trade that will look to get long this market on this pullback. See the following chart for the specifics of the strategy:

Save for oilseeds, hard red spring wheat, deferred rice contracts, and interest rate futures, the bulk of the futures contracts today are lower. Soybeans, especially old crop, have been notably resilient. Cuttin' time will soon be upon us for winter wheat, so maybe I will start checking out spreads between the Minneapolis (Spring Wheat) and Kansas City (Winter Wheat) markets. I'll get back to you on that if I see a reasonable play.