Beware Of Friday The 13th

Each year we usually encounter one or more Fridays falling on the 13th. While we are all supposed to be rational investors who disregard suspicions, the truth is that such days have brought negative market reactions. There is reason to fear Friday the 13th on its face...particularly if the masses are looking for an excuse to sell out. So, is the equity market vulnerable to a Friday correction? The only significant statistic for release is the producer price index (PPI) which is an inflation indicator. Today's strong action suggests there is nothing that will get in the way of the stock market juggernaut. Low inflation, moderate interest rates, good corporate earnings...what can go wrong? Technically, equity markets look "overbought." The relative strength index (RSI) crossed +70 while stochastic indicators have been displaying a high number for several weeks. Yet, stocks have been marching forward with little sign of weakness. While some analysts have pointed to the dollar's reversal as a potential precursor of a correction, investors remain unimpressed. The chart appears constructive with higher highs and higher lows within a reasonable channel. Thus, technical signals are in conflict.

Dollar/Oil Divergence

Additional mixed signals can be found in the contradiction between the dollar and crude oil prices posted in dollars. One would normally expect oil to rise as dollar parity deteriorates. Yet, the falling dollar is in tandem with lower energy prices. Certainly, lower crude translates into less inflation. In turn, less inflation points to steady or lower interest rates. Lower U.S. interest rates make the dollar less attractive. There's the argument.

I have been bearish in oil and have suffered several short side attempts that finally took hold with our current position. While I favorably viewed dollar fundamentals, I was forced to sell the D- mark rather than assume another short in the dollar index. This is fortunate in light of the deterioration against the yen. I also watched our Canadian Dollar profits erode during the past week's adjustments.

Strategically, the dollar may be making a bottom against the yen despite today's magnificent sell-off. The problem is that dollar/yen parity has not been instrumental in reversing trade imbalances. The rumor is that G-7 is going to debate the dollar's relative position and its trade impact at the upcoming meeting. As I predicted more than a year ago, currencies are going to follow distinctly separate paths as we approach the 1999 Maastricht Treaty implementation of the Euro. Few would deny that Western Europe is undergoing political shifts that can challenge the unity movement. June currency positions must be rolled into September or liquidated since expiration is Monday. Given the volatility, I am inclined to take profits and allow markets to rest a week. With bonds making an upside run, currency traders are supposed to anticipate a dollar decline...Perhaps that's why the dollar index is up 70 points today! All of France will be on vacation in August. Don't expect the Socialists to move until September. This is likely to stall European currencies.

No June Grain Rally, Yet

Corn, wheat, and oats continue declining as crop conditions continue favorable over most growing regions. The squeeze on old- crop July soybeans is still with us, however, new-crop September is on track to clash with new cash crop at the end of August. I was too early entering the September/August bear bean spread, but we had so much profit in the July/November, I became anxious. It is still extremely early and "weather markets" are several weeks away. We must wait for corn tasseling towards the end of July and bean podding early in August.

Several weather forecasters are calling for hot and dry conditions.

So far, it's been wet and wild with cooler temperatures in north central states. We have a small profit in August beans that needs to widen to at least 20 cents before we can move protection. I still expect a test below 7.75...particularly if weather remains reasonable. The real question concerns a technical test below 7.40. I do not expect old crop to dip below 7.20 support, but new crop could easily plunge below 6.50. This sets up another downside challenge of 6.20 and, indeed, below 6.00. From there, we are in more normal price ranges.

Assuming we can achieve a 20-cent buffer in beans, we might be able to wait out interim volatility. Absent any dramatic events, beans will bounce in a wide range as traders pit themselves against each other without direction.

Pork Complex

The most frustrating aspect of this is our failed attempt to short bellies in the 90s. After missing a rally, we went to market and were stopped. Now, bellies have busted and we were on the sidelines. With prices limit-down and below 8000, we will have difficulty entering the short side without excessive exposure. As always, there question is why bellies reached their lofty levels in the first place. Cash bellies deteriorated because low grade product finally pulled down the entire complex. While futures call for a premium belly, reality says we'll eat anything.

June 12, 1997
Philip Gotthelf
Commodity Futures Forecast
7000 Boulevard East,
Guttenberg, New Jersey

Relocated 06-13-97
Last updated on 06-13-97

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