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SIEGEL
TECHNICAL MARKET UPDATE
FOCUS ON THE SUGAR MARKET: Sugar prices remain on the defensive as the prospect of shipments from Brazil and projections for a large European crop have forced the bulls to turn tail. Heavy fund selling combined with continued long liquidation out of the expiring October contract have now pressed prices to their lowest level since early May. Concern over heavy deliveries next week on the soon-to-be spot October contract by two large trade houses has also taken a toll on trader sentiment as evidenced by the rapid drop in open interest. Pushed into the background has been the potentially negative impact of El Nino, which may still affect crop production throughout Southeast Asia in the months ahead. However, with the European sugar beet crop now forecast to reach 18.4 mmt.–just below the 1994 record of 18.7 mmt. , El Nino would have to wreak considerable havoc on countries such as Thailand and India to radically change the prevailing fundamental outlook. Indeed, with a buildup in stocks since 1994 now estimated between six million and nine million metric tons, many analysts say that supplies are sufficient to meet even the most optimistic demand hopes. In the long run, prices may bounce back as traditional buyers such as Russia, China and India return to the market. However, even though it's estimated that world-wide demand will outpace supply for the first time since the 1994-95 crop year, the recent jump in world production combined with the ample stock levels should mute any concern over shortages developing. Should the market be hit by further global production increases, the stage will be set for even greater losses, as the market retraces all of its year-long advance.
The bar chart clearly displays a market in retreat. Today's close (Thursday) marks ten consecutive days in which the March contract has closed lower. Thus far, the October contract has declined a total of 1.4¢/lb. from the contract high posted in mid-August. The collapse of the October contract has widened the October/March spread from a .15¢/lb. premium in July to .72¢/lb. under today, which reflected the unwillingness of traders to pay more for immediate supplies. The March contract has now retraced 50% of the January/August advance in about one month. Projections for a drop back to 11¢/lb. now appear probable. However, the now highly oversold stochastic enhances the odds for a correction, which should see prices rebound back above 11½¢/lb. before renewed selling is seen. It is this correction we are now counting on to establish new short positions. Until then, a sideline stance is warranted.
Recommendation–Look to sell 11.65¢/lb. Buy Stop–12¢/lb., close only. Objective–10¢/lb.
FOCUS ON THE U.S. TREASURY BOND MARKET: A strong reception to the sale of five-year notes by the U.S. Treasury and rumors that the auction of 30-year bonds will be curtailed due to the Treasury's reduced financing needs kept the buyers active most of this week. The fear of a limited supply of U.S. securities rallied the bulls and sent prices to within a few ticks of the contract high posted on July 31st at 116-07. However, on Thursday, a leaked report that existing home sales had jumped 3.3% in August, along with a 2.7% rise in durable good orders, served to force the nervous longs to the sidelines, rasing additional concern over a potential a double top at the contract high. Technically, the downturn of the overbought stochastic also suggests that a correction might be looming, thereby forcing this market to lose some of the gains posted since bottoming on September 11th. If so, we'd expect a break back to 114-00, right on top of the 18-day moving average. However, should the next round of government data keep the bulls charging, predictions of a rise to 118-00 would gain more credibility. All things considered, with the stock market looking toppy and the U.S. Dollar still on the defensive, a nominal retracement of the recent 4½-point advance would not be surprising. Accordingly, we see a near-term shorting opportunity and recommend that aggressive traders consider the following trade.
Recommendation–Look to sell at 115-28. Sell Stop–116-10, close only. Objective–Initially, 114- 00.
September 25, 1997 Siegel Trading Company, Inc.
549 Randolph, Chicago, Illinois
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