Prepared by Phil Tiger

The CRB Index has turned lower and, in fact, closed below the 236.5 low of August 21 on 11/25.Therefore, the price work done between 236 and 246 over the past 4 months is now formidable resistance. A turn back up would require a close above 242 and particularly above 246. Traders should watch the CRB Index closely as a test of the July low at 232 could be pending and a break of that level would be quite negative. There remains the possibility of a 4th-quarter 1997 low but such a low is now becoming more likely to occur in February/March, 1998 in light of the recent weakness. Traders should be aware of the negative connotation for the current market price structure and exercise appropriate caution until such time as a seasonal (cyclic) low becomes apparent.

Grains and oilseeds are stabilizing but are possibly topping out–at least for the near term. Harvest is no longer a factor and South America is off to a good start. A near-term trading range with a mildly bearish bias appears likely.

The 1998 corn carry out is estimated by the USDA (November 10th) at 929 million bushels. This is not a bullish number and some analysts foresee even larger carryouts. The 1998 old-crop May/new-crop December corn spread is weak–at 8-week lows of 1-cent May premium. The July/December corn spread is a similar situation–trading near support of 5 cents July premium with resistance above 15 cents July. Stand aside for now but one should consider the long May (or July)/short December corn spread on signs of a bottom in the spread. Note however, that a major move in favor of the old-crop May or July corn is unlikely to begin much before the second quarter of 1998.

Wheat/corn spreads are trading sideways. The December relationship had dropped as low as 65 cents wheat premium but is now back near 71 cents wheat premium. The July wheat/corn relationship has slipped a few cents to near 80 cents wheat premium. The next trade to look for in these relationships is to buy July corn/sell July wheat on 4th-quarter wheat strength (perhaps to near $1 wheat premium). Keep an eye out for a wheat rally but stand aside for now.

Intradelivery wheat spreads remain weak. The December/May wheat spread had dropped to near 28 cents May premium as the delivery period began. While carrying charges will inhibit further gains for the back spreads, the forward spreads appear to have at best, limited potential. The old-crop May/new-crop July wheat spread is trading near a weak 4 cent July premium. Stand aside.

Intermarket wheat spreads remain quietly steady. The trend is still positive for March Kansas City versus Chicago wheat and remains positive for March Minneapolis versus Chicago wheat as well. The Minneapolis/Chicago spread set new contract highs at 33 cents Minneapolis premium (11/25) while the March KC/Chicago spread remains within 3 cents of its contract high of 12¾ cents KC premium (9/26). Stand aside in both KC and Minneapolis versus Chicago wheat spreads for now as they appear rather rich.

The soybean complex turned sharply higher in October but is giving some evidence of having topped out (11/11 at $7.49 January). The overall trend is still up but rolling over with support near $6.85 basis January. A test of support could be seen in the period just ahead. The 1998 carryout estimate (per the November l0th USDA report) is at an adequate 255 million bushels but that number could become smaller if demand continues at a pace ahead of a year ago. Domestic harvest is no longer a factor and weather is South America has stabilized and is not a factor at the moment. The January/July soybean spread had slipped to near 23 cents July premium but then rallied back to near 7 cents July and is now steady near 9 cents July premium. Little major movement is expected in the spread near term. Next year's old-crop July/new- crop November soybean spread had also firmed from near 17 cents July premium to a ten-week high of 42 cents July premium (11/11) and is trading just below that level. Nevertheless, the spread could slip back seasonally in the period just ahead. Stand aside in old-crop/new- crop bean spreads though aggressive traders might wish to try the back spread above 40 cents July premium for a 10- to 20-cent move in favor of the new-crop November.

Nearby crush values are easier with values for January near 65 cents, March near 52 cents, and May near 40 cents. Soy oil product values are steady with December through May between 35% and 37% with the nearer months weakest though one should note the flattening of values. Soy oil spreads remain on the weak side. The May/December 1998 oil spread has slipped some 75 points from recent highs to near 30 points May premium. Look to reinstate the long May/short December 1998 soy oil spread on a set back to even money to a December premium in the period just ahead.

Soybean meal spreads have firmed again but are expected to peak in the current time frame. The January/May meal spread rallied to a new high on 11/28 near 1,050 points January premium. Hold the short March/long July meal spread (from 11/10 at 350 points March premium). A second position will be added if the spread can rally to 550 points March premium. The nominal stop is at 750 points March for both positions while the objective is a July premium of 100 to 500 points. Note that this back spread is one of the most seasonally reliable trades in meal with highs usually made in the 4th quarter of the year and lows generated by the fist week of March.

The January soybean meal/soy oil spread had rallied to new highs near $8,300 meal premium (contract value) and then dropped back to support near $6,750 meal where support was seen. Stand aside for now but begin looking at long soy oil/short meal for March (currently near $6,650 meal premium) and May (currently near $6,150 meal premium) on near- term strength.

Meats and meat spreads remain mixed. The December/February cattle spread remains firm and at marginal new 6-month highs of 70 points February premium. The February/April cattle spread found support at the recent lows of 390 points April premium and is hovering just above that level. Long February/short April cattle was initiated on 11/25 at 380 points April premium. Use a 45-point nominal stop with the first objective at 250 points April and smaller April premiums possible. Orders to buy June/sell October cattle at 275 points October premium were filled at the price on 12/2. Look for a potential seasonal low in the current time frame. This will be the first of a multiple position. A move to a June premium is the objective for this favored seasonal trade. A nominal 150-point stop is suggested initially.

Cattle/hog spreads have become choppy but are still trending in favor of cattle. The February cattle/hog spread generated new contract highs at 885 points cattle premium on November 24th and has since set back 125 points. Stand aside at current levels but favor long cattle/short hogs on a further sharp break to below 600 points cattle premium.

Hog spreads have also bounced in favor of the nearbys. The December/February hog spread set new contract highs near 225 points December premium on 12/1. Stand aside. Continue to watch the April/July hog spread (currently near 700 points July premium) for a back-spreading opportunity. Be prepared to initiate the back spread on a rally to 250 points or less July premium but do not go against the trend which favors the back month.

The February belly/hog spread had slipped to new lows near 420 points hogs premium on 11/24 in line with seasonal tendencies but is now rebounding a bit. Stand aside as we appear to have missed this one. Begin watching the July belly/hog relationship (near 800 points hogs premium) but no position is advised at current levels.

December T-bonds remain steady and at the high of their range. The March MOB spread has rallied off the recent contract low of 72/32nds (11/18) Muni's premium and is attempting to stabilize. Resistance begins at 90/32nds Muni's premium. Traders should consider long March Muni's/short T-bonds (MOB spread) at 80/32nds or less Muni's premium. Use a 12/32nds stop with the first objective 100/32nds Muni's (achieved) and higher Muni premiums possible.

The December NOB spread (from 175/32nds T-bonds premium of 9/24) was liquidated on 11/26 at 236/32nds T-bonds for a 61/32nds loss. The March NOB is at its (contract) lows of 248/32nds T-bonds as this is written. Aggressive traders should consider the March NOB on signs of a bottom with a stop beneath the lows. A return to levels of 128/32nds or less premium T-bonds is expected.

The March TED spread has a high (10/17) at 104 T-bills premium and a recent (11/25) low at 85.5 T- bills. Look to sell the spread (buy March Eurodollars/sell T-bills) on a rally above 96 points T-bills premium.

Use a stop at 107 T- bills with the first objective at 84 points T-bills premium and the second objective at 65-70 points T-bills premium.

The March 1998/March 1999 (calendar) Eurodollar spread has broken to new lows at 183 points premium the nearby. Aggressive traders should consider the forward spread at this level. A nominal 8-point stop is suggested. A 20-point profit objective appears to be appropriate.

The December S&P 500/Value Line spread has rallied some 4,000 points (12-week highs) after basing in the area of 6,000 points S&P premium. Support lies between 5,500 and 7,000 points S&P premium while resistance is significant above 10.500 points S&P premium. Stand aside for now but begin watching the March Value Line/S&P spread (currently near 10,080 S&P premium) for potential trading opportunities going into the new year.

Currency spreads (crosses) remain choppy. The U.S. Dollar has strengthened versus most foreign currencies and is now stabilizing. The December Japanese Yen/Deutschemark spread is groping for support near 2,150 points J-yen premium–just above the contract low. The trend is still favoring the D-mark. Stand aside for now.

The December Japanese Yen/Swiss Franc spread has a similar pattern to the J- yen/D-mark spread. Contract low's near 765 points J-yen premium (November 12th) have uncovered support. Longer term, a shift in favor of the J-yen is expected. Stand aside.

The December Swiss Franc/Deutschemark spread rallied to test recent highs near 1,380 Swiss Franc premium. Those who established long December D- mark/short Swiss Franc spreads at 1,360 points Swiss premium on November 7th should hold. The Swiss Franc has approximately a 24% premium over the D-mark at that level. A Swiss premium above 20% is historically high. Hold the cross with a nominal 25-point stop and a 200-point profit objective. Longer term, the D-mark should be favored.

Precious metals remain mixed. Silver continues stronger than gold and well above its lows while gold made 12-year lows just below $294 (December) on December 1. The spot gold/silver ratio has slipped to new lows near 56 (a 10½-year low) but has some support at that level. The ratio is expected to favor gold over the longer term with 80-85 the objective.

The April platinum/gold spread has steadied and is trading some $15 above recent lows near $70 platinum premium. The spread is a candidate for a potential long platinum/short gold spread at $75 platinum premium for a move back above $100 platinum premium. Risk is estimated to the $60 platinum premium level.

Copper and copper spreads remain weak as expected. Seasonals point to a low in the current time frame. The December/May copper spread set a new low near 270 points May premium on 12/2. The May/December 1998 copper spread should also set a seasonal low within the next 60 days–perhaps near 200 points December premium (currently near 90 points December premium). The forward spread will be considered at that time.

New York softs remain mixed. Coffee has firmed. The March/May coffee spread has rallied to near 625 points March premium while the July/December 1998 coffee spread has rallied to near 1,350 points July premium–up from recent lows (11/3) of 450 points July. Consider the forward spread on a break with a stop under the recent low. The Brazilian freeze season begins in May. The objective is for a July premium approaching 1,500 points.

Cocoa and cocoa spreads remain unchanged with a negative tone. The March/July cocoa spread is trading near its lows near 55 points July premium. Stand aside for now but keep an eye on the March and May forward cocoa spreads for a potential forward spreading opportunity on a near- term low.

Sugar and sugar spreads are steady with new highs set on December 2nd. The fundamental outlook still appears to be somewhat negative. The March/October sugar spread set new contract highs on December 2nd at 66 points March premium and remains near that level. Further gains to 80 to 120 March premium would warrant initiating the back spread for a seasonal move back to even money.

Continue to stand aside in the lumber spreads.

March forward cotton spreads remain in down trends. The March/July cotton spread set a new contract low on 12/2 at 255 points July premium. The old-crop May/new-crop December 1998 cotton spread is trading down near 325 points December premium where carrying charges begin to inhibit the risk. Stand aside in the cotton spreads for now but begin looking at the 1998 May and July/December 1998 forward spreads.

Hold the long March/short July FCOJ spread (from October 10th at 600 points July premium). The spread should favor March during the turn of the new year and especially from current levels where carrying charges act to limit the risk. A nominal 200-point stop is suggested with 400 July to even money as the objective.

The entire energy complex has weakened with new lows or a test of the lows seen in all components. Only the natural gas and unleaded gasoline have failed to generate new contract lows. The nearby spread values for both the petroleum complex as well as natural gas have also weakened with new lows set in the January/March crude oil and heating oil spreads. The January/March natural gas spread is testing the contract lows while only the January/March unleaded gasoline spread remains in the middle to upper end of recent price ranges.

All of the nearby petroleum complex spreads are at discounts (contangos) and even the January/March natural gas spread has lost newly 700 points from its highs generated at the end of October.

Continue to hold the long January heating oil/short unleaded gasoline spread from 80 points heating oil premium (August 20th). The spread has weakened considerably but is expected to bounce back from an oversold condition near 350 points unleaded gasoline premium. Be prepared to liquidate the position on a rally near term. Then stand aside. Note that the April, May, and June unleaded gasoline/heating oil spreads are already reflecting a 750-point gasoline premium. Stand aside.

December 8, 1997 Phil Tiger

Tiger On Spreads

P.O. Box 64401, Chicago, Illinois

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Tiger On Spreads
Spreads Trading
Consensus National Futures and Financial On Line Index

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