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SIEGEL
TECHNICAL MARKET UPDATE
FOCUS ON THE CORN MARKET: Uncle Sam shocked the feed grain market this week by cutting its forecast of 1997 corn production to 9.276 billion bushels, down 424 million bushels from the July estimate and 17 million bushels lower than last year. Citing dryness in June and July throughout parts of the Midwest and mid-Atlantic states, the USDA projected new-crop corn yields to average 125.3 bushels per acre, sharply under the pre-report guesstimates that saw yields of 129.24 bu./acre and production at 9.567 billion bushels. As a result, estimated ending stocks have plummeted from the 1.196 billion bushels forecast in July to 847 million bushels, or 94 million lower than last year. In addition, the USDA projected a 10% drop in the forecast for Chinese corn production, also due to months of dry weather in their northern plains. The cumulative losses among the world's two largest corn producing nations has depressed total world corn production by 23.2 million metric tons, to a total 572.1 mmt. Without a doubt, these new figures have sharply contradicted optimistic projections made earlier this season for a sharp jump in world feed grain supplies, mostly as a function of increased planted acreage and early spring seedings. In fact, along with the estimated 5.72 mmt. decline in total foreign corn production, the current world ending stock figure is now expected to drop by 15.51 mmt. to 70.79 million metric tons, which keeps the stock-to-usage ratio at a very low 12%. Corn stockpiles at the end of the next crop year (August 31) should equal only 55 days of usage.
The bears, though badly bruised, were able to counter these bullish numbers somewhat by citing that the USDA used data accumulated around August 1, just before considerable rain hit the driest area of the Corn Belt, both here and in China. The view that the USDA's latest numbers were overly pessimistic resulted in expectations for an upward revision in the upcoming September report, especially if further rain should fall as the plants fill throughout the remainder of this month. However, considering the increasing concern that the very cool August temperatures now occurring throughout the Midwest may foster an early frost, many feel that crop conditions could worsen even further. Already, temperatures in Canada and northern Michigan have fallen into the frost range and extended forecasts continue to show a relatively cool month of August. While talk of frost seems far fetched during what should be the “dog day's” of summer, the fact that highest corn producing states still remain vulnerable to further damage and yield losses only compounds the bullish government crop data released this week. While we feel that the large beginning global stocks of 86.30 million metric should dampen any immediate concern of supply tightness, it's also apparent that with demand projections remaining high, the supply/demand situation could worsen markedly in the next crop year. According to the reaction among analysts at the Chicago Board of Trade following the USDA reports, there is now going to be a distinct shift of trader focus for the upcoming marketing year away from formerly bullish oilseeds and back into the grains. Indeed, considering the growing world population, the tightening stock levels and the necessity for increasing food production worldwide, the reaction to any shortfall could easily spawn considerable upward movement in cash and futures prices down the road. While most of us tend to concentrate on day- to-day market action, we often neglect to consider the bigger picture from which major trends develop. The bulls are already saying 1998 will be the year of the grains. In this regard, only time will tell.
From a technical perspective, the sharp rally in the wake of the bullish USDA crop numbers keeps corn prices on track to recover more of the ground lost since April. Chartists are now pointing to the double top posted at $2.74/bu. and the moderate pullback that's occurred at this resistance. However, considering that low open interest data indicates a fair amount of bearish skepticism and with short-term trends positive and the stochastic rising, we continue to see enhanced odds for higher prices. While weather factors should continue to dominate near-term trader sentiment, a move through the double top will be very difficult for technicians to ignore. The next upside objective should be near $2.90/bu. with a challenge of the $3.00/bu. level quite possible. A pull back to the ascending trend line at $2.51/bu. would be an outstanding buying opportunity. However, we doubt seeing a break of this magnitude just yet. We'll target $2.60/bu. as our new entry level, but may be forced to raise our sights as conditions warrant.
Recommendation–Look to buy near $2.60/bu. Sell Stop–$2.50/bu., close only. Objective–Initially, $2.90/bu.
FOCUS ON THE U.S. DOLLAR: Growing concern that implementation of Europe's single currency could be delayed appears to have given the prosperous dollar bulls a case of the jitters. Speculation that higher interest rates in both Germany and Japan could be just around the corner set the stage this week for some long liquidation that quickly forced the Greenback to a three week low. A drop in the U.S. stock and bond markets also undermined the bulls as interest rate as a round of strong economic data resurrected concerns of Fed tightening. However, an article appearing in a London newspaper that both France and Germany would be willing to delay the introduction of the EMU to entice the British to join the new currency union proved to be the prime catalyst behind this week's break. While British officials denied any change in their policy, the damage had already been done.
Following the dollar's plunge, many analysts began to predict that a substantial correction was finally underway. A few even claimed that a long-term top had been posted. However, if this is the case, and the dollar has fallen from grace, we'd expect to see a fundamental shift in investor attitudes toward the U.S. economy in relation to other members of the G7. Thus far, this has not occurred. Without a doubt, predicting the reversal of capital flows from one economy to another is a daunting task–especially when individual countries are vying to meet economic standards for a new single currency. Reports out of Germany and Japan now indicate that price pressure is beginning to heat up despite their slow economic growth. Thus far, low exchange rates have not had the desired effect of jump starting their respective economies. Nevertheless, it's felt that the onset of high inflation could force them to hike their short-term rates and hopefully not choke off any recovery. Already, an IMF report predicts that Japanese rates will rise later this year as growth begins to rise. Thus far, the Japanese claim no change to their fiscal policy, despite the rumors. However, in the FOREX markets, anything is possible.
In Germany, the Bundesbank monthly report also expressed concern over rising inflation, which heightened expectations that the German central bank will tighten credit, thereby making mark-denominated assets more attractive to investors. Like Japan, economic analysts feel that Germany can ill afford higher exchange rates, which could also play havoc with their economic recovery. Germany also denies any change in fiscal policy. Nevertheless, hearing all the reports, rumors and conjecture over the EMU, inflation and interest rates, it appears that the dollar bulls have found ample reason to take a breather. While we feel that talk of a long-term top is still a bit premature, predictions of a sustained correction now appear to have merit.
The daily bar chart reveals the Fibonacci retracement bands, which range between the contract high and double bottom posted near 9400. Short-term trend line support is now found at 9924. A close below 9900 would serve to inspire technical minds and set sights on the 50% band at 9785 followed by the 61.8% retracement band just below 9700. Though the bears are now out in force, their is yet little confirmation of a long-term top. Some technicians feel that the current conditions warrant a period of consolidation and a formation of a topping pattern before the die hard dollar bulls are ready to concede. If this is so, then a rally back to the contract high could be in cards. At this point in time, it would take little to resurrect the bull trend and reignite buying interest. Forced to take a stand, we'd opt for a further correction, perhaps down to 9800 where some support could be uncovered. Short-term traders should consider the following trade:
Recommendation–Look to sell the September U.S. Dollar Index near $100. Buy Stop–100.20, close only. Objective–Initially, 9900.
NOVEMBER SOYBEANS: More Midwestern rain and a bearish USDA Crop report has driven this contract back to the trend line support. We project further deterioration as the brunt of record production continues to weigh on the market.
Recommendation–Look to sell near $6.25/bu. Buy Stop–$6.35/bu., close only. Objective–$5.80/bu.
DECEMBER COPPER: Rising LME stock levels remain a burden on the red metal. However, the bulls still hope to see a pickup in industrial usage, greater demand and a run above $1.10/lb. We still feel that the path of least resistance remains on the downside.
Recommendation–Look to sell near $1.05/lb. Buy Stop–$1.07, close only. Objective–$1.00/lb.
DECEMBER WHEAT: The charts continue to show a vulnerable food grain market with a diverging slow stochastic. A close below $3.65/bu. could see prices fill the gap left at $3.55/bu. However, we'd look to be a buyer at that level.
Recommendation–Look to buy near $3.55/bu. Sell Stop–$3.48/bu., close only. Objective–$4.00/bu.
OCTOBER CRUDE OIL: The energy complex continues to follow lock step with the strong gasoline market. However, we continue believe that crude prices are overvalued relative to prevailing supplies and look for an impending collapse.
Recommendation–Look to sell near $21/bbl. Buy Stop–$21.25/bbl., close only. Objective–Initially, $19.25/bbl.
OCTOBER LIVE CATTLE: While the on-feed numbers remain abundant, a pickup in marketings and prospects for higher cash has encouraged some bottom picking. Should the next COF report reveal strong movement and marketings above 107, we'd expect a rebound back above 71¢/lb.
Recommendation–Pending the outcome of the COF report we'll stand aside.
OCTOBER LEAN HOGS: Ample hog marketings continues to keep this contract at a steep discount to cash. However, the jump back above 72¢/lb. suggests that this spread may narrow in the weeks ahead. The oversold stochastic now enhances the odds for a rebound.
Recommendation–Look to buy near 72.50¢/lb. Sell Stop–72¢/lb., close only. Objective–75.80¢/lb.
August 14, 1997 Siegel Trading Company
549 Randolph, Chicago, Illinois
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