wmeubank@ocp.kcmo.com
SIEGEL
TECHNICAL MARKET UPDATE FOCUS ON THE CORN MARKET:
Though the long-term fundamentals still support a bullish outlook for new-crop corn prices, for the moment, it appears that the bears have retaken the initiative. The extremely slow pace of export sales combined with persistent selling of corn by the Chinese to other Asian countries continues to dampen traders' sentiment toward this feed grain, keeping prices on the defensive. This week, export sales at 470,000 tons again came in below expectation and well under the pace required to reach the USDA target for the 1997/98 crop year at 51.44 million metric tons. Analysts surmised that prices will have to decline even further in the weeks ahead for the U.S. to effectively compete with China, who remains an aggressive seller of corn to other Asian nations. It's obvious that the strong U.S. Dollar has users (especially Asian users) now seeking any price advantage they can find. And with the world already fearing the economic impact of the Asian currency crisis, one could expect that further financial shock waves emanating from that part of the world, would only weigh further on U.S. export prospects. Of course, the bulls continue to keep the faith and still see better times ahead. According to Uncle Sam, ending stocks this year are expected to represent only about 9 percent of annual consumption, very low by historic standards. With stocks this tight, any threat to world grain production, especially if related to the ongoing "El Nino" weather phenomenon, could have a dramatic effect on the U.S. markets. Forecasts for hot, dry conditions moving into Australia over the weekend are already generating talk of possible low southern hemisphere feed grain crops. In addition, it's expected that once China drops out of the import picture, as many analysts soon expect, Asian countries such as South Korea, Taiwan and Indonesia, whose needs are becoming more urgent, would be quick to flock back to U.S. shores, regardless of exchange rates. Nevertheless, with the harvesting pace accelerating (66% done) and grain elevators quickly filling, we expect any further disappointing news on usage to translate into even more long liquidation. However, once the bins are filled and farmer intentions to sell or hold becomes apparent, the bullish fundamental scenario could assert itself, once again.
In the current trading environment, another sharp rally, similar to that occurring earlier this month, is a distinct possibility. Technically, we see that prices have already retraced 50% of the sharp October rally, but still appear vulnerable to further liquidation. The latest Commitment of Traders report revealed that large traders currently hold long positions totaling 420.8 million bushels. It also appears that small speculators added another 50 million bushels during the recent sell off. This heavy long commitment creates a rather tenuous situation and suggests further purging of weak long positions, especially in the event that prices penetrate the trend line support now at $264 1/2/bu. Conversely, good buying developing between current levels and the trend line would be a promising sign and most likely encourage further buying and a drive back above $2.90/bu. On the weekly chart, corn prices remain in an uptrend, although this week's price action and soon-to-be-overbought stochastic suggest some further consolidation prior to the next upward surge. According to Moore Research Center, corn has no seasonal advantage during the months of October and November. Nevertheless, we continue to view breaks as buying opportunities.
Recommendation--Look to buy near $2.68/bu. Sell Stop--$2.65/bu., close only.
Objective--$2.90/bu. FOCUS ON THE S&P 500 STOCK INDEX: The shock waves emanating from the Asian currency debacle appeared to reach to a crescendo this week, resulting in the largest one- day plunge in the Dow Jones Industrial average and harrowing declines in all other global stock indices. Similar to the October massacre of 1987, whose 10-year anniversary was amply highlighted by the press (and for the most part, discounted), yet another vicious <169>Black Monday<170> was consigned to the record books, along with a good chunk of investors' equity to boot. While pundits were quick to point out that, on a percentage basis, the crash of 1987 was much worse, (22% versus 7.18%), most found little solace in this news and instead chose to focus on the fact that the total one-day point loss of 554.26 was the worst ever. Even the highly touted circuit breakers could not stop the selling frenzy that permeated throughout all of the world's financial markets. Though the market was able to stage a sharp billion share rebound the next trading day, and erase a good percentage of the losses, it appears that the damage done to investor and trader confidence will take much more time to heal. Indeed, as the fall out from the currency crisis is still unknown, there is a feeling that, unlike the sharp recovery that followed the 1987 plunge, investors will be reluctant to throw caution to the wind and simply buy more stock. The sobering news that funds managed by Niederhoffer Investments, Inc. lost their entire equity position (reported at 45 million) in just one day, provides a reality check to those seeing investments tied to the stock market akin to bank certificates of deposit.
While the long-term effects of the Asian financial crisis are difficult to predict, reports are beginning to surface that some Brazilian banks are already facing liquidity problems, which some fear could easily spread to other Latin American countries and ultimately cause U.S. exports to suffer. Here at home, analysts are now questioning the ability of companies in the high technology sector to sustain their heady price multiples and continue to lead the market to higher ground--and for good reason. While on balance, the U.S. is a buyer of products from most small Asian nations, Japan, which has never emerged from its own six-year economic morass, is a net exporter. In fact, almost half of Japan's exports now go to the rest of Asia. Considering the vast amount of business U.S. high tech companies transact with the Japanese (IBM books 75% of its Asian sales to Japan), the worries over future high tech profitability appear more than justified. Should Japan be forced to pare back their purchases of semiconductors, processors and the like, companies with stock prices reflecting many time future earnings, which many on Wall Street still consider quite rational, could come under fire and face considerable selling pressure. On the other side of the fence are those who see the fallout from Asia's debacle as limited. U.S. exports are strong to Latin America and are picking up in Europe. Sobering comments by Treasury Secretary, Rubin and Fed Chairman, Alan Greenspan over the health of the U.S. economy implies that interest rates will remain low and the business climate strong. If so, once the Asian dust settles, history could once again show that astute investors deciding to "keep the faith" were able to reap the greatest rewards. In this matter, only time will tell. Is simply buying this break the right thing to do?
This time around, we're not so sure. The major uncertainties spawned by the demise of the venerable Hong Kong stock market suggest that, at the least, a major correction in the U.S. markets could now at hand. While one could debate, pro and con, the long-term impact of Asia's problems relative to the U.S., the irrefutable fact is that U.S. investors depend entirely upon companies churning out reliably remarkable earnings growth. If economic growth in Asia slows more than American companies expect, there will inevitably be more earnings surprises to come--possibly many more. Should investors opt for a neutral corner and decide to shift capital out of the stock market and into government securities and money market funds, the result could prove rather uncomfortable for the bulls, to say the least. If a picture is worth a thousand words, then little needs to be said about the bar chart of the new Dow Jones Industrial futures contract and the S&P 500. In one fell swoop, the market gave back over 68 percent of the gains enjoyed since mid-April. The sharp reversal on Tuesday was equally impressive. However, we question whether this strength can or will be sustained. Should investor confidence be shaken any further, a drop through the Dow 7000 level and the S&P 900 level could occur with little prompting. In this event, another 500 Dow points could quickly fall by the wayside. In any event, we feel that at least a retesting of the recent lows is in order for each index. At this point, we intend to remain bearish and use a rally back to 935.00 in the December S&P 500 and/or 7500 in the December DJI to reestablish short positions. The purchase of put options would afford limited risk while facilitating our attempt to capitalize on the markets next downside surge.
Recommendation--December S&P 500. Look to sell near 935.00. Buy Stop--950.00, close only.
Objective--850.00. December Dow Jones Industrial Futures. Look to sell near 7500.
Buy Stop--7750, close only. Objective--7000.
FOCUS ON THE U.S. T-BONDS: The 30-year U.S. T-bond continues to benefit from the <169>flight to quality<170> now being spawned by Asia's financial woes. News that one or more Brazilian financial institutions may have suffered hefty losses in the recent turmoil, which could negatively impact emerging markets throughout Latin America, appears to be the latest concern now effecting the credit markets. And while recent comments made by Fed Chairman, Alan Greenspan, highlighting the strong U.S. economy and low inflation, were designed, in part, to console investors, recent price action indicates that the effect could be rather fleeting. Nevertheless, indications that the Fed will not aggravate an already tense situation and raise U.S. interest rates, clearly favors bullish traders. Though analyst's argue that in a classic flight to quality, shorter-term maturities are favored over the longer term, the fact that futures still remain over 118-00 indicates strong demand throughout the yield curve. Chartwise, we view the stair step advance in the December futures as pointing to even higher prices. Obviously, the Asian currency problems will remain the focal point among credit traders. However, lacking concern over Fed action to hike interest rates during the next FOMC meeting in November, the market should remain well supported on breaks. While talk of 122-00 seems a bit ambitious, a move to 120-00 is not out of the question. We remain bullish and plan to reestablish the long positions that we offset this week at 118-00.
Recommendation--Look to buy near 117-00.
Sell Stop--116-14, close only. Objective--120-00.
October 30, 1997
Siegel Trading Company
549 Randolph, Chicago, Illinois
Technical Corner Index
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