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COMMODITY FUTURES FORECAST
WEEKLY REPORT
Prepared by
Commodity Futures Forecast
Is Greenspan Trading The S&P?
Certainly, if you knew your statements could move T-bond futures almost two full points in one session and the Dow more than 100, there might be the temptation to trade associated futures and options. Two issues stand out as our Fed Chairman made his remarks yesterday. First, at a time when government leaders claim they want to control excessive market volatility, the preemptive statements by Greenspan must be considered a contradiction. Equally important, the Fed clearly makes President Clinton out as a liar when he says he wants to create “more jobs.”
Who is really in charge and what are the motives? If the Fed's incentive is to slow the rate of job growth while Congress and the President work to promote full employment, our economy is facing opposing forces. Given the speed and influence of Mr. Greenspan, it appears obvious that the Fed has the upper hand...perhaps, even the final say. However, as corporate earnings are digested in the coming weeks, many analysts believe the threat of increasing interest rates will abate.
I have avoided trading stock index contracts because of the excessive inter-session and intra-day volatility. The S&P and sister indices are among the few contracts offering day trading possibilities. If you treat five- and ten-minute intervals as 5-day and 10-day moving averages, you could be on the same level as soybeans! Since Commodity Futures Forecast is as weekly service, it is not feasible to pick trades based upon minute-by-minute intervals.
Even my recent attempts at trading bonds crashed into inter-session volatility. A look at the chart reveals the propensity for sharp corrections that cannot be accommodated with reasonable weekly stops. The base formation from March to May appears to be a stepping point for a rally through August. However, the June and July corrections were more than modest for most traders. When the market dipped and consolidated from August forward, a technical pattern for a test below 11100 was established. Yet, bonds staged an impressive 3-day rally to challenge the summer highs.
The question is whether Greenspan's influence will carry bonds back to 11200 support. The consensus is that the Fed is inclined to push rates higher anticipating inflationary forces. If so, 11200 may only be a resting place for a decline to 11000. Perspectives have been altered toward a negative spin on upcoming earnings announcements. Any indication of health may be viewed as an early warning sign of Fed action. With this spooking the market, there is a new short-side bias developing.
I don't like to get in the way of moving trains. Stocks and bonds seemed to be trekking in tandem toward new records. Since Greenspan's previous damper on the market was short-lived, there is a risk the current statements will fade. On the other hand, recent price action in energy and grains hints that costs could be rising sooner than expected.
Seasonal Grain Strategy
Our near-term attempt at taking advantage of normal seasonal patterns failed to produce positive results. Exuberance over export prospects coupled with El Nino uncertainty helped propel soybeans to interim highs. Despite the likely chance for a bearish production report, technical signals and fundamental sentiment are currently bullish.
As mentioned in previous reports, I am also bullish in grains for deferred contracts. This is why we have assumed the bull spreads in wheat, corn, and soybeans. When trading this far into the future, it is often difficult to maintain outright contracts and options are usually too expensive. So far, our July/November soybeans have widened to 24 cents while the wheat spreads have turned negative. The unusual March/May/July wheat relationship points to a recovery since March is 10 cents under July while May is 2 under. While this looks like a normal or “contango” market, we are dealing with old crop/new crop. If there is a squeeze, March should exhibit the dominant premium over July while May represents the “transition” month.
Even with the loss in our wheat spread, I feel this is an opportune time to add positions. It seems unlikely that the spreads will increase far over near since March is already close to full carrying charges. The cog in the wheel is the forecast for a very mild northern hemisphere winter with an associated huge wheat crop. In contrast, drought among southern hemisphere producers could easily balance a bumper U.S. and Canadian crop. Between now and March, I feel confident spreads will reverse.
Meats Remain Weak
I was concerned that oversold conditions in live cattle and lean hogs would bump us out of our short positions. Yet, prices remained weak since last Thursday. Placements and breeding numbers point to lower prices through the spring deliveries and some analysts don't see firming until the September-December 1998 deliveries.
While the export focus has been on grains, I would not be surprised by a boost in animal shipments. In particular, Japan and China may be in the market for U.S. pork and beef. It is early for near contracts to reflect such interest, but I am still looking for better price performance in the June and July meat contracts. In the meantime, we will tighten stops again.
October 9, 1997Philip Gotthelf
Commodity Futures Forecast
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