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It's a shame that this well thought out piece didn't provoke a bit more
discussion here. Perhaps everyone is too preoccupied with the equity
markets to note what is going on in commodities. The commodity markets
have been declining for nearly 20 years ... since 1982 which just
happens to coincide with the beginning of the great bull market in
equities. A considered review of the major commodity groups should lead
the astute trader/investor to the conclusion that a great bull market in
commodities is in the early stages ... like rolling the clock in the
equity markets back to 1982. If the hot money to which John refers
begins moving from equities to commodities, these things are going to
take off. The pendulum is swinging and bringing with it fundamental
shifts in producer attitudes toward supply and demand. The list is
growing ... energy (production cut backs), industrial metals (production
cut backs), grains (less planting), precious metals (decreased forward
sales), ....... all in an economic environment where demand is sure to
grow.
Earl
----- Original Message -----
From: <I4Lothian@xxxxxxx>
To: <realtraders@xxxxxxxxxxxxxxx>
Sent: Wednesday, January 26, 2000 10:29 AM
Subject: [RT] FUTR: Effects of Low Prices and Burgeoning Hedge Fund
Assets on CornFutures?
I have two personal technical trading models I monitor. These are tools
I use when assisting clients assessing the markets. One is a
trend-following system and the other is a short-term responsive
counter-trend system. Recent action in the corn has produced several
consistent failed sell signals, or set ups, for the responsive system.
Previously, buy signals or set-ups for the trend following system had
been failing regularly over the past year in the grain markets. This
change indicates to me a shift in investor sentiment. This shift in
sentiment may indicate interest in the grain markets from longer-term
traders with pockets full of money earned in other markets, particularly
the phenomenal equity markets of the last several years IMHO.
Another factor is that during times of falling prices, end-users tend to
buy physical supplies in a hand-to-mouth manner. Their market
psychology is that they will be able to buy tomorrow's needs tomorrow
for cheaper prices than today.
A shift in end-user market psychology to needing to cover tomorrow's and
the next 3 months or beyond worth of needs today before prices rise too
much can be a very bullish factor. It has been my experience that
end-user purchasing managers’ goal is to buy at the average yearly
price
or below. If the range of expectations for the market change, and a
larger yearly price range is possible, that may encourage end-user
purchasing managers to step up their length of coverage.
Now, I am not saying these things are happening. However, in reading
the market I sense a change in the market scenario and that leads me to
try to anticipate how that will affect participants’ actions. Some
of
this is just thinking out loud, so to speak.
The X factor is the Hedge Funds and other sophisticated investors who
may choose to diversify their portfolios with an investment in physical
commodities and/or futures. In the case of corn, the most
cost-effective way to invest is to buy futures, IMHO. However, position
limits in U.S. futures markets may restrict some of these parties from
participating fully in a manner consistent with their other
investments. But, a herd mentality for Hedge Funds getting into a
sector or particular market could have a dynamic impact, even with the
position limits. And some Hedge Funds have been known to play the cash
market in order bypass position limits on futures contracts. Thus, they
remain a dynamic factor to be considered and watched.
If the Hedge Funds come to get involved in the corn market, it is not
for a nickel or dime, they are coming for a much larger move. And, a
larger perceived opportunity by longer-term, well-capitalized players
becomes a market factor in and of itself for the end-users and others
participants to consider.
One of the most bullish factors for a limited supply commodity market is
a low price and we have seen those this last year in the grains and soy
complex. Low prices build a larger demand base. Marginal livestock
producers are able to stay in business because of the lower feed costs.
That demand base does not fade with nominally higher prices. It takes
consistently higher prices to force end-users to alternative inputs or
out of production.
I believe the current price rise in corn has the makings of a classic
demand-pull rally. I believe I am not the only one that sees this.
And, I believe we could be for a much more lively corn market in the
coming year than many expect. Just some things to think about.
Regards,
John J. Lothian
Disclosure: Futures trading involves financial risk, lots of it! These
are my opinions alone and subject to change without notice and should
not be construed as a recommendation to buy or sell futures or futures
options contracts.
Disclosure: John J. Lothian is the President of the Electronic Trading
Division of The Price Futures Group, Inc., an Introducing Broker.
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