TIGER ON SPREADS Prepared by Phil Tiger
General Comments
(January 10, 2001) As Tiger on Spreads enters its 21st year of publication a brief look backwards and forwards seems appropriate.
The past 20 years has witnessed the development of many new futures markets such as financials and energy as well as the eclipse of many of the old markets such as potatoes and plywood. Tiger on Spreads has, during this time, learned to reemphasize trading discipline as well as the importance of price histories and seasonal studies. Technical and fundamental analysis remain important but must be viewed in the context of the other factors.
We note the development of the computer both in the larger sense as serving trading and research as well as increasing the capabilities of individual traders. Electronic trading is still the new kid on the block but is expected to evolve into the primary trading platform--replacing open outcry in the U.S. markets.
The ebb and flow of physical commodity values will continue but in new contexts and the laws of supply and demand will not be repealed. Nevertheless, the only factor one can count on is change and Tiger on Spreads will remain in the forefront of recognition and application of such changes as they occur. The new millennium holds much promise of both opportunity and hard work. Tiger on Spreads is committed to meeting both challenges.
2000 was a somewhat difficult year. The first quarter saw several trades stopped out with measurable losses. This was followed by a succession of profitable trades right into December. The Japanese Yen/Swiss Franc spread then proceeded to generate a $2,500 loss that put Tiger on Spreads into the red for the year as time ran out.
2001 begins with only a modest 2 lot position in the October/March Sugar spread on the book and looking positive. The overall outlook is positive as many seasonal trades look attractive this year and many price values are historically near the low ends of their ranges. Note that the year begins with an assumed starting equity of $15,000 as in every year.
The CRB Index broke in the beginning of December, but found support above the long-term uptrend line. The October highs in the CRB Index are defined now as resistance. The technical perspective for the CRB Index remains positive. The trend in the CRB Index will remain positive as long as the October lows are not violated.
Grains And Oilseeds
Grains and oilseeds remain in a trading range though a modest bullish bias has developed. Interdelivery spreads remain quiet and more weak than strong.
Corn and wheat spreads are little changed with the old-crop May/new-crop July wheat spread in a 2-cent trading range and the old-crop July/new-crop December corn spread 2 cents above its early December low of 18 cents December premium. Consider the forward spread on a retest of the lows. A major move is not expected in view of the large carryout, but a trade could develop from the lower levels.
The July corn/wheat spread continues firm--reaching 48 cents wheat premium last week after trading as low as 81 cents wheat premium in mid-October. Wheat price potential continues to be viewed as bullish by many analysts, including Tiger on Spreads, and therefore a stand aside attitude is suggested in the corn/wheat spreads for now.
Intermarket wheat spreads have corrected a bit. The March Kansas City/Chicago wheat spread has slipped from 55 cents Kansas City premium to 46 cents Kansas City and is now in the middle of that range. Kansas City wheat should be favored on weakness. The March Minneapolis/Chicago wheat spread has slipped 10 cents from its highs and is at support near 48 cents Minneapolis premium. Stand aside.
The soybean complex remains choppy, but has also experienced a rally on demand for soybean meal based on European fears of Mad Cow Disease (featuring an increase in demand for soybean meal to replace animal products). Though the meal rally could continue, seasonal studies point to a high for meal in the current time frame.
Nearby soybean spreads had achieved measurable nearby premiums on the meal situation. The January/July bean spread had rallied some 8 cents from mid-November, but slipped back 6 cents this past fortnight to 23-1/2 cents July premium. The spread normally favors July into the new year and has traded as low as a 28-cent discount. Stand aside. Next year's old-crop July/new-crop November soybean spread has rallied to a 6-cent July premium, but is apparently running out of steam. The spread is expected to return to a November premium as the old-crop carryout is still expected to exceed 300million bushels. Be alert to a possible back-spreading opportunity in the period just ahead.
Crush spreads continue strong with January having setting new highs near 90 cents premium products and remaining within a few cents of that level. Stand aside. Soy oil values are still historically low. Keep an eye on the soy oil for a potential low in the period just ahead.
Soy oil spreads are stable because of the limitations of carrying charges (near 100%), but soy oil remains with an abundance of supply. Carryout estimates are in excess of 2 billion pounds. The January/May soy oil spread remains near 75 points May premium. The spread is near 100% of full carry. Risk is low but so is profit potential. Stand aside.
Soybean meal spreads have been steady on the Mad Cow Disease switch from animal based feeds to soybean meal. Traders still holding long January/short May meal positions were stopped out on December 8th at 500 points January premium for an 800-point gain. The seasonal spread of long July/short March Meal was established on December 11th at 450 points March premium, but promptly stopped out December 21st at 680 March for a modest loss. Continue to watch the spread for potential reentry in the period just ahead. The spread has a strong seasonal tendency to favor the July and especially as warmer weather approaches. The spread has a longer-term objective of a July premium.
The January soybean meal/soy oil spread has rallied up to $10,750 meal premium. The trend is favoring the meal. Those long December meal/short soy oil took profits as time ran out. Stand aside.
Livestock
Meat markets are still steady. The next Cattle on Feed report will be on January 19th. Current fundamentals remain positive for the spring months of cattle, but less than exciting.
Maintain open orders to buy June/sell October cattle at 200 points October premium. The spread usually generates a low near year's end and rallies in favor of June into the second quarter of the year. A scale down addition to the spread will be entered when and if the initial position is filled. A nominal 200-point stop is suggested. The objective for the spread is 220 points or more June premium.
The February/April cattle spread had rallied 150 points in favor of February only to set back 100 points in November. Support lies below 150 points April premium with resistance at 50 points April. Trade from the long side on setbacks. Stand aside in the feeder/fat cattle spreads for now.
Cattle/hog spreads are choppy though with a bias favoring cattle. The spreads had been favoring hogs after favoring cattle in October, but reversed back in favor of cattle in December. The February cattle/hog spread is in a range between 1,700 and 2,200 points cattle premium. Stand aside for now, but be alert for a long cattle/short hog position on a sharp reaction.
Hog spreads have turned down again. The February/April hog spread had broken from 215 points February premium to 50 points February during October and November, but has now slipped to 85 points April premium. Stand aside. Longer term, keep an eye on the April/July Hog spread for a seasonal back spread on strength (currently near 300 points July premium). Look for a move to 700 points or more July premium by April 1st.
The February belly/hog spread set a high of 2,080 points bellies premium on May 15th. The spread had been favoring the hogs since then and broke to 450 points bellies premium. The spread has bounced back to as high as 1,200 points bellies premium as this is written. Stand aside for now, but keep an eye on this one for a potential long February bellies/short hog position on a test of support near 600 points bellies premium.
Financial Futures
The T-bond market has been rallying on a slowdown of several economic indicators and some anticipation of reductions in interest rates by the Fed. Support was below 97, but resistance above 101 has been penetrated and objectives near 105 have been achieved.
The March MOB spread has slipped as low as 68/32nds T-bonds premium. Support is evident near that low and the development of a positive aspect to the March MOB spread should result. Stand aside for the moment, but be alert for a recommendation for the spread--and particularly if a concurrent top develops in the March bonds. A move back to a Muni premium appears likely over the longer term.
The December NOB spread was running firm near 48/32nds T-notes premium, but has slipped to 5/32nds T-notes on recent T-bond strength. A T-note premium should be maintained. Long March T-notes/short T-bonds is favored at a T-bond premium.
Currency spreads (crosses) have been active. The December Japanese Yen/Swiss Franc spread has broken sharply to new lows near 2,550 points Japanese Yen premium. Aggressive traders were advised to buy the March Japanese Yen/sell the Swiss Franc on December 1st and did so at 3275 Japanese Yen premium. However, the position was stopped out on December 14th at 3075 Japanese Yen premium for a 200-point loss. Stand aside for now, though the relationship appears to be undervalued.
The Euro FX has been improving and has finally turned up. The Euro FX/Japanese Yen spread had continued to feature the independent weakness of the Euro FX, but has now become more two-sided and favoring the Euro FX. The March Euro FX should be favored versus the Japanese Yen from support levels near even money. Consider long March Euro FX/short the Japanese Yen (or Swiss Franc equivalent) at 200 points or less Euro FX premium. Use an arbitrary 75-point stop with a significant Euro FX premium as the objective.
New York
Precious metals continue to struggle, but have seen further signs of a possible developing rally. The April platinum/gold spread set a new high on December 4th near $337 platinum premium and has remained near that level for a month. A top may be developing, but it is too soon to say. Consider buying April platinum/selling gold on a sharp ($50) break to perhaps $295 platinum premium for a potential move to at least retest the highs. Otherwise, stand aside. The Spot Gold/Silver Ratio remains steady, near 59. Stand aside, though gold should be favored over the longer term.
Copper and copper spreads have continued with a negative bias since highs were set at the beginning of October, but are beginning show signs of support (in line with seasonal tendencies). The May/December copper spread had rallied to 185 points May premium from April lows of 100 points December premium, but then dropped down to near even money. The May/December copper spread is a reliable forward spread into the first quarter of the year. This spread tends to favor May from a fourth quarter low. A December premium is desirable before initiation of the spread, but that may be difficult to establish this year. Open orders to buy May/sell December copper at even money were filled on January 2nd. Place orders to add to the position at 120 points December premium. The first objective is a 150- to 200-point premium May with larger May premiums possible. Stops will be open for now until a two-position trade is established though the risk is protected by carrying charges.
New York softs remain fundamentally and technically negative. Coffee prices have set back to 8-year lows. The July/December coffee spread is of interest (currently near 740 points December premium). The spread is protected by carrying charges of approximately 200 points/month and has a good seasonal tendency to favor July in June on any weather (freeze) scare. Margins are reasonable though one may have to watch this one for a long time. Place orders to buy July/sell December coffee at 750 points December premium. The stop will be open for now with the first objective at 550 points December and smaller December premiums possible.
Cocoa and cocoa spreads had set back, but the spreads have been rallying albeit at a modest rate. Fundamentals remain negative. The March/July cocoa spread has moved in favor of the nearby. The spread has gone from 25 points March premium to 23 points March. The July/December cocoa spread had been trading at a 60-point discount, but has firmed to 40 points December. Though cocoa still appears to be fundamentally bearish, the spreads are indicating an improving supply/demand balance. Stand aside for now, but be alert to a possible turn in cocoa.
Sugar and sugar spreads had favored the nearby March, but have shifted to favor the back spreads. Here too, fundamentals point towards over supply and there is a good seasonal tendency for the March/October sugar spread to favor the back month October into the March expiration. Long October/short March sugar was established on November 17th and 20th at 137 and 145 March premium (141 March average) respectively. The stop is a close above 160 March while the objective is 50 March to an October premium.
Cotton and cotton spreads have been active. The old-crop July/new-crop December cotton spread set a summer low near even money and has rallied as high as 550 points July premium (end November) since then. The spread is currently near 200 points July premium. Consider the forward spread on weakness to 100 or less July premium. Otherwise, stand aside.
The March/July frozen concentrated orange juice spread has weakened. The spread tends to favor the back month into the "freeze" season as longs roll forward in January and February. Watch this one, but hold out for a better entry point though the spread may not be viable this year.
The energy group has become choppy in spite of the cold weather. Natural gas remains strong, but very volatile. Margins have increased appropriately. The petroleum complex has become two-sided. Winter appears to be setting up to be colder than normal after 3 years of higher than normal average temperatures.
The nearby natural gas spreads remain firm and new all time highs have been seen in the natural gas. The February/April natural gas spread had broken briefly to support near 500 points January premium, but quickly rallied to new highs near 3,500 points February premium. How high is high enough? One can only speculate. Stand aside for now. Weather has been cold and reality seems to point to a normal and cold winter (note the lack of either a La Nina or El Nino weather event evident this year).
The petroleum group spreads hit new highs in November, but have since turned back down. The spreads remained somewhat negative in December with the exception of the heating oil spreads that are still steady and inverted.
Heating oil had been steady versus unleaded gasoline, which is not a surprise in view of Seasonality. Stand aside, but long February heating oil/short unleaded gasoline could have further merit in the period just ahead (currently near 700 points heating oil premium). The forward spreads in heating oil are favored on weakness. Consider the long February/short April heating oil spread on a set back below 900 points February premium. A nominal 150-point stop is suggested and test of the high near 1,500 points February premium is the profit objective.
Now is the time to begin watching the seasonal spread of Long May (or June) unleaded gasoline/short May (or June heating oil). The May spread is currently near 900 points unleaded premium with a high of 1,290 points unleaded premium set back on June 30th and a recent low set near 725 points unleaded premium on December 8th. (The June spread is currently near 945 points unleaded premium with resistance above 1,200 points unleaded premium) Stand aside, but watch the spreads though current unleaded premiums are on the high side.
January 10, 2001 Phil Tiger Tiger On Spreads P.O. Box 64401, Chicago, Illinois 312-648-2869
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