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SIEGEL
TECHNICAL MARKET UPDATE
FOCUS ON THE SILVER MARKET: Triggered by a steady decline in COMEX warehouse stocks and improved demand, the silver market has recently come back to life. In addition, the perception that silver has finally divorced itself from the influence of gold, which has been pummeled by heavy sales by the worlds central banks–and is beginning to act more as an industrial metal–has definitely helped improved its image. However, the greatest impact on trader sentiment has been the decline in warehouse stocks of silver maintained at the Commodity Exchange (COMEX) in New York, which have dropped to 141.1 million ounces, down nearly 60 million ounces from the level seen in May. Even more impressive is the recent study by the Silver Institute done for Gold Fields Mineral Services, which indicates that total identifiable supplies of silver bullion have fallen by 540 million ounces since the end of 1990. In fact, identifiable stocks now equal four years of the supply/demand gap recorded in 1996. Reports that physical silver is moving out of New York and into London to meet increased fabrication needs, suggests renewed demand for this precious metal. In addition, a rise in shipments to the Middle East and India is also helping also helping deplete stock levels. Indeed, with silver utilized in electrical components, photographic films, batteries and jewelry, this steady jump in physical off take strongly implies that this beleaguered metal may finally have turned a corner. And even more impressive is the fact that the sharp price advance from contract low posted back in July has occurred despite a surge in the U.S. Dollar, stocks and government securities. If the tide has indeed turned for silver, then further declines in warehouse stocks could create a condition similar to that experienced in copper, where solid foreign demand kept world stock levels low and prices skyrocketing during the later part of 1993 and most of 1994.
The monthly continuation chart indicates silver's rocky ride since 1993, which continues to keep traders mostly on the defensive. However, should the bulls attract more believers in the weeks ahead, a move back to the $6.00/oz. level appears quite possible. Clearly, this is silver's best technical performance since January 1995, when speculative buying, based upon declining inventories and inflationary fears, catapulted prices through $6.00/oz. At the moment, here in the U.S., signs of inflation are mostly absent. However, should a few timely government reports alter this perception, fundamental conditions for this metal would be similar to those seen in 1995. However, the rally notwithstanding, there remain many who still see little fundamental reasoning behind the recent strength and claim that this market is an accident waiting to happen. With the stochastic now reading overbought, and higher prices beginning to curtail overseas demand, we also sense that the odds for a correction have increased. Nevertheless, as the longer term picture has changed with the markets surprising strength, the overwhelmingly bearish outlook that permeated this metal just 3 months ago has abated. Accordingly, unless a total collapse occurs from current price levels, a nominal drop back toward $5.00/oz. could uncover renewed speculative buying and help give this long tarnished metal a welcomed boost.
Recommendation–Look to buy December silver near $5.05/oz. Sell Stop–$4.95/oz., close only. Objective–Initially, $5.50/oz.
NOVEMBER SOYBEANS: Ideal harvesting conditions and increasing prospects for seeing a record 2.746 billion bushel crop (or greater) continue to favor those expecting more seasonal weakness ahead. However, increased world buying of soybeans, as evidenced by a 1.41 million tons weekly export sale, could begin to see demand reclaim a greater part of the fundamental center stage. U.S. prices are now competitive and South American supplies are dwindling, hence, the greater foreign interest. Technically, the oversold stochastic suggests that a rebound may be forthcoming. If so, we'd expect a rally back to $6.35 to $6.40/bu., where more selling should be uncovered. However, following this correction, we anticipate seeing more harvest pressure and, eventually, a drop back to $6.14/bu.
Recommendation–Look to sell near $6.35/bu. Buy Stop:–6.53/bu., close only. Objective–$6.14/bu.
DECEMBER WHEAT: Optimal harvesting weather for the U.S. spring wheat and a continued bleak export picture, despite sharply lower prices continues to pressure this food grain. Rain in Australia has helped offset ongoing concern over the impact of “El Nino” and knock out another fundamental prop from under this market. Tough competition for wheat among global producers continues to limit demand for U.S. product. In such an environment, there is little to be considered supportive for this market. Technically, this oversold market is prime for a rebound. However, this tune has been sung now for the past two weeks. Nevertheless, should a short covering rally recover 50% of recent losses, we'd see $3.70/bu. as a gift to the sellers.
Recommendation–Look to sell near $3.68/bu. Buy Stop–$3.80/bu., close only. Objective–$3.35/bu.
DECEMBER COPPER: The potent combination of rising stocks and increasing mine production continues to keep pressure on the red metal. Expectations for a seasonal increase in demand and a drop in inventories continues to keep the bottom pickers hopeful, however, this is yet to be seen. Slow economic growth throughout southeast Asia and the Far East remain major negative factors for this market, even though it's believed that China is in the wings and waiting for lower prices to begin accumulating metal. It's estimated that China will need approximately 300,000 tons of copper next year. The charts remain bearish with prices declining within a downward sloping channel. Prices have not been this low since early January, having already dropped nearly 21.60›/lb. since topping in mid-June. Last weeks short covering blast fizzled as fast as it began. We still see no reason to go bottom fishing and continue to recommend a sideline stance.
Recommendation–Stand aside.
DECEMBER LIVE CATTLE: The one, two punch of abundant supply and weak cash is clearly indicated on the daily bar chart. Fund liquidation spawned by poor packer demand amid concern over building animal numbers and rising supplies of pork and chicken has all but laid waste to the fat cattle market. Further scares surrounding E-Coli contamination of beef have also served to rekindle health concerns and hamper demand at the retail level. Long gone are the summer “hey days” when tight pipeline supplies forced prices up to 73¢/lb. Conversely, the low posted on Wednesday near 66¢/lb. marks the lowest level for this market since last December, and just a mere 80 points off the contract low. While some buying is evident at current levels, as the oversold stochastic encourages some bottom picking, the longer-term outlook still remains bleak. Although Mother Nature could throw the bears a curve with extended snow and bitter cold this winter, the large number of cattle on feed suggests that packers can now afford to be less aggressive over the next few months. Slaughter weights have risen steadily in the last 60 days, indicating that feedlots are losing the marketing flexibility they had in June and July when supplies were relatively tight. However, even though the last Cattle on Feed report revealed a 6% increase in marketings, the 7% jump in the on-feed number is all that's now being focused upon. Nevertheless, should demand remain firm, as indicated by the COF jump in marketings, supplies could begin to tighten towards the end of this year and into the next. Fundamentals remain positive for feeder cattle this fall, since the calf crop is down 2%. This could help increase heifer retention and tighten fed supply. In this event, prices could return to more favorable levels, perhaps sooner than expected. For the mean time, other than for the oversold technicals and a possible short covering rally, it's difficult to paint rosy picture for this commodity.
Recommendation–Look to sell near 68¢/lb. Buy Stop–70¢/lb., close only. Objective–64¢/lb.
WEEKLY CRUDE OIL: Heavy fund buying in reaction to bullish technical signals and reports of increasing tension in the Middle East between Iran and Iraq has virtually lit a fire under the crude oil market. News that U.N. weapon's inspectors are once again butting heads with the Iraqi government has also unnerved the energy complex and moved the bulls into a higher gear. Apparently the market is taking the U.N.'s threats to impose sanctions that could affect Iraq's humanitarian sales to heart. Crude oil stocks remain slightly below last year's level, however, ample heating oil stocks at 23.87 million barrels above the same period in 1996 imply smooth sailing this heating season. Nevertheless, refineries continue to run full out at 98.9% of capacity. We feel that unless the Middle East blows up, the longevity of crude at current price levels is limited.
Recommendation–Consider the purchase of limited risk put options for the December expiration, in the event November futures advance above $22/barrel.
DECEMBER S&P 500 STOCK INDEX: Index values continue to improve, as a strong performance in the T- bond market, amid signs of slower economic growth, has encouraged stock and fund investors. Growing concern over the health of high tech issues and any disappointment derived from the next crop of quarterly corporate earnings could be the markets undoing. The upcoming report on September unemployment should elicit the usual fireworks. However, at current levels, we feel that it will take a shocking number to move prices to new historic highs. Nevertheless, anything is possible. Pending this release, we feel that a sideline stance is warranted.
Recommendation–Temporarily stand aside.
FEBRUARY PORK BELLIES: Belly prices remain on the defensive, yet unable to shake off the influence of the super bearish hogs. Even a better-than-expected weekly movement of frozen stocks had little impact on the market that has now dropped more than 17¢/lb. since topping in early August. The charts suggest a possible double bottom at 62¢/lb. A solid close above 65¢/lb. would improve the odds of a partial retracement back to 70¢/lb. Aggressive traders should consider the following trade.
Recommendation–Look to buy near 63¢/lb. Sell Stop–61.80¢/lb., close only. Objective–70¢/lb.
DECEMBER COCOA: Continued uncertainty over Ivory Coast cocoa production, which represents as much as 41% of total world output, has moved futures prices into a tight trading range. Trade estimates for the main crop now range from 950,000 metric tons to 1.137 million metric tons, with most seeing a 1.0 million ton figure. The return of good weather to that region, despite early concerns over the impact of “El Nino” back in July appears to have taken some steam from this market, although potential problems in other global growing regions has forestalled a major collapse. The longer-term view that takes into account the structural deficits for this year also remain constructive, especially if world demand for cocoa remains strong. With prices range bound, and the stochastic reading neutral, short- term fundamentals will dictate price action. We remain friendly toward this market, although a correction would afford us a better buying opportunity.
Recommendation–Look to buy near $1600/mt. Sell Stop–$1575/mt., close only. Objective–$1775/mt.
October 2, 1997Siegel Trading Company, Inc.
549 Randolph, Chicago, Illinois
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