Mid Month Updates

Today is the last trading day for the July grain and oilseed futures contracts. They have provided us with a lot of action -- almost too much at times, and it will be bittersweet to see them go. July '09 Wheat was born in August of 2006, and gave us a $7.00/bu range during its lifetime.  During that same period, July '09 Corn gave us a $5.00+/bu range, and July '09 Soybeans a $9.25+/bu range. Those ranges were marked with big swings, so clearly they were not for the faint of heart. Yet they did provide ample opportunity for savvy traders with disciplined trading plans. So long July '09 contracts -- we'll miss you.

Bear Flag anyone? Check out the November Soybeans chart below. Tell me if you see a bear flag? (Click on the chart to make it bigger).

I've been fooled by these before, but that sure does look like a pretty bear flag.  As I've been taught, flags tend to break out in the direction of the prevailing trend. In my estimation, a downside breakout under the support trend line should yield a $0.36/bu move minimally, and perhaps $1.20/bu move if things get carried away and we meet the measuring objective equal to the flag pole. Lots of summer left, and lots of potentially adverse weather and other fundamental and potentially bullish factors to absorb -- yet the flag is there for now.

 Let's make the recent hog recos current ... The LHN9/LHZ9 spread is dead. LHN9 LTD is tomorrow. The spread at one time was profitable, and since has fallen back into negative equity territory. Two choices - get out of the spread as a spread, and take the approximate 80 point loss. Or, let the LHN9 cash settle, leaving the long LHZ9 position. Trail a stop in the LHZ9 position looking for more upside.

The options position is long 3 LHZ9 70 Calls at an average of 2 cents. Those options are going for about .75 cents, and I think they're ok to hold onto for now.

Cattle are strong. The LCz9 had every opportunity last week to make a run to sell stops under the range, yet it held and has popped right back up. I do not see much reason, at this point, to believe that it will make a strong run to extend into a new higher trading range.  So I am looking to sell it up here in the 90.50 to 91.00 area for a penny or two to the downside.

As for the financials. We are still in a financial maelstrom in this country and abroad. Economic recovery recently inferred by the big break in eurodollar futures with maturities in 2011 beyond was relatively shortlived. In May, the EDH1 an approximate 3.25% rate, and in June that jumped to nearly 4.5%. Now it's back to about 3.25%. A big "never-mind," I'd say. Yet, I think the upside rally in EDH1 futures is due for a pullback. After which, if it holds there should be another leg up to about 97.00 (3%). And if it does not hold, and the economies of the world appear on better footing this go-round, then rates may not  return to these levels for quite some time to come, in my opinion.

Good trading, Bob   

Old Crop Soybeans Independence

Having fully discounted the USDA acreage report yesterday, corn market tumbled and pressure was mounted in the wheat futures contracts across the country. Interestingly, within the last 25 minutes of trading, wheat had every chance to plummet toward the day's lows, yet it rebounded rather quickly to the tune of about 15 cents/bushel in a mere few minutes. Sure looked poised for a recovery of at least some of the losses. This morning I see that KC, Minn., and Chicago wheat futures are up anywhere from five to eight cents/bu. Wheat prices, for good reason in my opinion, have fallen quite substantially. Yet into oversold territory. And now I think it's poised for some sort of bounce. 

Old crop beans yesterday traded both north and south of unchanged. Old crop ended only modestly lower. Over night the SN9 & SQ9 are each up 19.75 cents. We went long SQ9 @ 1120.4, so the hope is that old-crop tightness considerations continue.

Lean hogs are off a little bit overnight. There are two strategies I've discussed that are still in play. The LHN9/LHZ9 spread offered the opportunity to vacate at a gain prior to the report last Friday. Those who chose not to vacate are incurring a loss, as the spread is now at -3.15, Dec under July. The improved performance with respect to retained pigs/litter and the March-May farrowings combined to pressure the deferred contracts (LHZ9), whereas the front-end supplies offered no bearish surprises -- propping up the LHN9. Thus, the heat.

Those still in the spread should, in my opinion, stick to the 3 cents risk based on the closing price of the spread. All sources I read indicate the producers are still suffering losses - maybe less of a loss, but still a loss. This cannot continue indefinitely without further breeding herd liquidation. And if liquidation occurs, the front end should fall some. The back end, in my opinion, wilL either stabilize or rally -- as thoughts will then turn to a decrease in supplies for the Dec. '09 thru early Q1 '10 time frame. These are my thoughts at this point. So far the market is telling me I'm a victim of poor judgement or poor timing, which is why the risk was defined.

The other hog play is the LHZ9 70 Cent Calls, which were recommended to buy in average-down fashion each 1 cent lower from 3 cents down to 1 cent. If done, the position is now long 3 LHZ9 70 Cent calls @ 2 cents, for a total risk of $2400.00. Looks like the last trade in that option is 0.75 cents. The same thought process as above applies to this trade, meaning I'm looking for a recovery in the next 4 months or so.   

On a fresh market -- let's take a look at the Britsh Pound. The BPZ9 has stayed in approximately 300 point weekly ranges banded by approximately the 162.50 to 167.50 level (that's $1.625 to $1.675 per British Pound). I think it is a good time to either get long a straddle or a strangle. The BPZ9 has at least an 84% correlation to two other years in the past, and if the correlation pans out the projected move would be a rally up toward $1.74 by early September. Conversely, the seasonal tendency for BPZ9 is for a rally into the end of July, and then a break into the latter part of August. Either scenario looks for movement, which is what one needs when buying volatility. I'll come back with some suggested straddles/strangles soon.

Bob // 1.312.987.2053; 1.800.388.0998 

Hogs & Pigs Report Tomorrow

At 2pm Chicago time the USDA will publish it's Quarterly Hogs and Pigs Report. Here are the estimates, compliments of the most excellent source of information which is Informa:

Note that the numbers published tomorrow by the USDA were based on a survey done in May, for expectations for June 1. Since, June has been an unkind month to the pork market - so we'll have to adjust expectations relative to the market conditions that ensued since the data for this report was compiled.

The bear spread in the hogs held steady today after yesterday's strong recovery. Care must be taken to protect gains ahead of this report, just in case something unusual happens.

Crops appear to be progressing decently, per the market weakness. Wheat harvest, too, must be moving along steady enough as both Chicago and KC wheat again pushed into new swing lows.

Bob

Futures and options trading entail substantial risk and therefore are not suitable for all investors.

Hog Spread – What a Difference a Day Makes

The backspread in the Lean Hog futures that had been causing some pain snapped back in a hurry today.

Take a look:

Now that this reco has benefitted from this reprieve, we'll turn our attention back to the original suggested profit targets and trade management. The original profit target was 2 cents from the entry zone of -0.75 to -0.95, LHZ9 under LHN9, so roughly +1.05 to +1.25 cents LHZ9 over LHN9. It looks like it went out near +0.10 today.

Contact me with questions & comments. Don't be shy.

Bob // 1.312.987.2053 & 1.800.388.0998

Futures and Options trading involve substantial risk and are not suitable for all investors.

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