wmeubank@ocp.kcmo.com
SIEGEL
TECHNICAL MARKET UPDATE
JANUARY SOYBEANS: Bullish soybean traders continue to shrug off signs of increasing world soybean production, choosing instead to focus on the record pace of global demand for both beans and products. A firm domestic cash basis, amid a lack of aggressive farmer selling, also remains constructive for the market and supports the contention that U.S. farmers will continue to hold on to newly harvested beans pending higher prices. Conversely, the potential for record new-crop production out of South America remains a visible threat to the bullish price scenario, especially with the USDA raising both the Brazilian and Argentinean production estimates due to record planted acreage. However, some analysts see ongoing planting problems in Brazil, related to the effects of “El Nino,”, causing yields to suffer, resulting in lower new-crop production. The bears counter with historical evidence from past El Nino growing seasons, indicating that Brazilian soybean yields tend to be higher when an El Nino is in force after planting. Also cited as a potentially negative factor is the weakening economies of southeast Asia that may begin to slow the record demand pace toward the end of the year. Nevertheless, for the moment, it appears that path of least resistance for soybean prices is to the upside. The ability of the market to rebound from sharp losses that followed the USDA Production report on Monday stands as testimony to the resiliency of this oilseed and the emphasis being placed on the demand side of the balance sheet. Indeed, with the U.S. harvest nearly finished, and the new-crop production numbers well known, we still expect that weekly reports on export inspections, sales and commitments will continue to be market-moving events. Signs that the record demand pace is not abating should continue to have a considerable influence on trader sentiment and support ideas of sharply higher prices into next year. In this regard, the return of China to our export market could have a tremendous impact on supporting the bullish scenario. Thus far, China has been importing lower priced beans from countries such as India, whose production estimate was recently raised from 4.93 to 5.34 million metric tons. However, considering China's enormous oilseed needs, and with world users on our doorstep pending the South American harvest in spring, even the hint of increased purchases from the U.S. would have a positive impact on trader sentiment, which could ultimately drive nearby futures back above $8.00/bu.
Turning to the technicals, the weekly continuation chart graphically displays the dramatic run up in prices since late September. Should the market continue its ascent and retrace 50% of the ground lost since topping out last April, January beans would register near $7.60/bu. A 61.8% recovery would take the market close to the $8.00/bu. level. Should any serious trouble develop with the South American crop, the market could literally be off to the races. While we cannot rule out violent corrections, such as the one that occurred early this week, unless the torrid pace of demand begins to ebb, our near-term outlook for soybeans and soy products remains positive.
Recommendation–Look to buy near $7.05/bu. Sell Stop–$6.88/bu., close only. Objective–$7.50/bu.
DECEMBER SILVER: In contrast to the recent plunge in gold prices that reflected growing concern over central bank sales, strong demand for silver, amid dwindling warehouse stocks, has sent that metal skyrocketing. Indeed, reports of further declines in warehouse supplies of silver stored at the COMEX Exchange in New York, continues to keep traders nervous over the possibility of a classic short squeeze–that is: forcing those obligated to make delivery on short positions to pay dearly for limited supplies of the metal. On Wednesday, it was reported that COMEX silver stocks totaled the equivalent of just under 26,000 contracts, while open interest for the nearby December contract registered 50,175. The most recent COMEX data shows COMEX stocks unchanged at about 129.3 million ounces, down about 36% from the average of 203.5 million ounces in the fourth quarter of 1996.
Also buoying silver prices this week were rumors of an engineered “short squeeze” on silver originating in the London markets. These rumors have been circulating for several months, while at the same time, silver stocks continued to erode to their lowest level of the year. The sharp rally from the $4.25/oz. back in July appears to coincide with the squeeze rumors. Indeed, even though the gold market's recent fall from grace helped to pressure silver throughout much of October, the rapid rebound that's occurred from the October 28 low strongly suggests that the potential squeeze play to be more than just a rumor. Certainly, the exchanges and U.S. future's regulators have the obligation to create a fair, orderly market and ultimately may see an emergency situation in the making. If so, history has shown that limiting new positions to liquidation only in the expiring contract and/or doubling or tripling the margin requirements has a way of rapidly purging excessive open interest and extinguishing any engineered squeeze. However, seeing that we're only into the second week in November, the odds favor a wait and see attitude prior to the first notice day on November 28. Up until that date, it's possible that ongoing squeeze talk and/or further declines in warehouse stocks could send futures prices to even higher ground. Of course, should the situation be resolved and stocks levels mysteriously begin to increase, a swift collapse could result. In futures trading, it's well recognized that a rumor typically has a far greater impact on trader sentiment than fact. The anticipation of an event usually sees prices reach unrealistic levels only to fall back when the event proves to have a limited impact on the market. Nevertheless, we find that December silver has now retraced over 50% of the October sell off, rallying today alone by nearly 23¢/oz. The next chart resistance is found at the October high of $5.33/oz. followed by the contract high posted last February at $5.532/oz.
As far as gold is concerned, with prices dropping to a 12-year low and approaching the psychological $300.00/oz. level, the factions remain divided. On one side are those who see gold as a bargain, especially in light of the global stock market volatility, concern over a Mid East flare up and hope for another stellar jewelry demand season. Should prices ultimately bottom at $300/oz., the reflex rally could see the “yellow metal” rebound back above $320/oz. Conversely, with the rumors concerning gold's diminishing role in the upcoming European Monetary Union, and the increasing central bank sales to bolster sagging capital reserves, the fundamental outlook remains tenuous at best. Should the new European Central Bank decide to omit gold from its reserve holdings, the metal would be dealt a mortal blow. Thus far, these rumors have not been substantiated. Nevertheless, with central banks throughout Europe aggressively lending gold to increase returns on reserves, the increased supply has only contributed to its year-long demise. And although substantial physical demand for gold is being stimulated at these lower price levels, most analysts still remain overwhelmingly pessimistic. Down the road, decreased mine production could begin to limit supplies, especially with prices below the cost of production. However, at this point in time, it appears that $300/oz. mark last tested in 1985 will soon fall by the wayside.
Recommendation–Silver: Look to buy on a pullback to $4.85/oz. Sell Stop–$4.70/oz., close only. Objective–$5.50/oz. Gold: Look to sell near $310/oz. Buy Stop–$320/oz., close only. Objective–$280/oz.
DECEMBER LEAN HOGS: The large open long commitment continues to leave this market vulnerable to further short covering and a retracement of the sharp losses incurred since last July. As the December contract is now in line with the cash market, and with a seasonal buy window wide open, the odds appear to favor additional near-term strength. According to data supplied by Moore Research Center, the June hog contract has a tendency to advance during the period of November 11 to January 11. We'd expect to see the nearby December contract follow suit. Packer profit margins are in the black and hog slaughter is skyrocketing. Expectations for strong holiday ham buying should help keep product prices strong. Overall supply fundamentals remain negative, however for the near term further short covering is expected. Technically, the rising slow stochastic tends to compliment our projection of seeing prices recover back to the 61.8% Fibonacci retracement band near 65.50¢/lb. The rally off the secondary bottom at 60.50¢/lb. is also a promising sign. We feel that some bottom fishing is now in order.
Recommendation–Look to buy near 61.85¢/lb. Sell Stop–60¢/lb., close only. Objective–65.50¢/lb.
DECEMBER U.S. T-BONDS: Reoccurring demand from nervous stock investors still reacting to Asia's financial crisis continues to bode well for the T-bond bulls. Talk that a slow down in the world economy will likely reduce the inflationary potential overall, and the Fed's recent decision to leave U.S. interest rates unchanged, also has many now looking for higher credit prices. In addition, Iraq's decision to test the resolve of the U.N. has encouraged increased demand for U.S. government securities, as those already anxious from the stock market's ongoing gyrations have yet another reason to seek a safe harbor. The long bond yield has now reached its lowest level since February 14 at 6.10% and is closing in on the psychological 6.00% benchmark. Our upside target at 120-00 still appears to a rational objective. All things considered, we've decided to postpone our top picking efforts and concentrate on the bullish potential once again.
Recommendation–Look to buy near 117-00. Sell Stop–116-00, close only. Objective–120-00.
November 13, 1997Siegel Trading Company, Inc.
549 Randolph, Chicago, Illinois
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