FOCUS ON THE SOYBEAN MARKET: Great harvesting weather throughout the Midwest and the prospect of a 2.8-billion-bushel soybean crop had little influence on the bulls this week, as speculative fund buying drove prices to near a four-month high. With the world now forced to turn to the U.S. for their soybean needs, the outlook for a sharp increase in both domestic and global demand appears to have traders discounting the well-touted production increase and already believing that a seasonal low is already in place. According to experts, demand for U.S. beans should be particularly strong this winter to do a shortage of South America supplies, which were depleted by strong foreign demand during the summer months. The decline in South American soybean supplies now opens the door for extremely large U.S. soybean usage in the new-crop year, but also for record soybean imports by both Argentina and Brazil. And even with record U.S. supplies there is no guarantee that users will be able to get hold of new-crop beans as farmers, looking for higher prices, appear to be holding on tight to newly harvested supplies. The effect of El Nino on Southeast Asia palm oil production has also raised worries that a drought in that region could spawn greater demand for U.S. beans and products. Already, the Chinese have committed to purchasing 700,000 metric tons of U.S. soybeans for the 97/98 season. However, this number could grow as the year progresses.

At the moment, traders are awaiting the new round of USDA supply/demand estimates as of October 1. A sharp increase in the demand side of the balance sheet (exports and crush) could help offset production gains, now widely expected, and reduce carryover supplies below the 285 million bushels seen in the September 12 report. However, based upon the September 1 Stocks report, carryin supplies are expected to rise by 17 million bushels, to 132 million total, which could help bolster the new-crop carryover number and give merit to those seeing this number exceed 300 million bushels once again. Nevertheless, seeing weekly soybean sales reach their highest level since 1987, while meal exports continue to skyrocket, it's apparent that over the next few months, traders will continue to focus on the growing usage trends. This week's trading action clearly demonstrates what can happen when a lack of selling interest, for whatever the reason, catches the market by surprise. With harvest pressure lacking, and the need to move supplies to market quickly this year, it's quite possible that farmers will continue to store soybeans in hopes of higher prices. As production numbers are discounted over the next few weeks, and considering the recent sharp jump in export sales, reports of tenders, inspections and new commitments should have a significant influence on short- term price action. Without a doubt, this new-crop year promises to offer plenty of surprises for both bull and bear alike.

The charts indicate a short-covering rally took place this week, as the supply bears were forced back to the sidelines. Talk of seeing prices advance back above $7.00/bu. is keeping bullish hopes alive. However, a solid close above $6.85/bu. is needed to further inspire chart watchers like us. Pending the outcome in the upcoming supply/demand estimates, we'll opt for a neutral corner. However, we'd view a quick drop back to $6.40/bu. as a potential buying opportunity.

Recommendation–Temporarily stand aside.

FOCUS ON THE CRUDE OIL MARKET: Official talk of Iran's increasing missile capacity at a time of increasing tension between the U.S., Iran and Iraq continues to leave the energy markets in a state of flux. While bearish supply factors still loom, traders should focus on the upcoming United Nation's progress report on Iraq, which will be seen as barometer for the current humanitarian sales of crude. While few feel the program will be rescinded, Saadam Hussain's recent skirmishes with U.N. weapons inspectors could find the U.N. a bit less accommodating. Of course, should push come to shove between Iran and Iraq, a Mideast flare-up would certainly be taken seriously be the marketplace. Here at home, strong refinery utilization continues to keep the balance sheet relatively flat. According to the American Petroleum Institute, crude oil stocks at 307.1 million barrels are less than five million barrels under year-ago levels. Overall global demand also seems strong, considering the recent off take from the North Sea and West Africa. A light fall maintenance schedule should also help keep the refinery rate above last year. On the product side, the continuation of summer-like weather could help extend the driving season and, hence, demand for gasoline. API stock levels of unleaded at 198.5 million barrels are just 2.2 million above the same time last year. However, unless the Middle east explodes, decreasing gasoline demand, amid relatively robust dealer inventories, could limit a further price advance.

Turning to the heating oil, with winter fast approaching, petroleum distillate supplies remain a whopping 22.2 million barrels greater than October 1996. The strong production pace continues to virtually guarantee that the pivotal Northeastern U.S. market will be well supplied this year. All in all, it appears that news emanating from the Middle East will continue to keep traders on edge, and indifferent to prevailing negative fundamentals. Prices appear to be establishing a near-term trading range, as a Fibonacci 38.2% pullback from the contract high posted last Friday near $23.00/bbl. has already generated some technical bottom picking. The stochastic is beginning to show divergence, which is a typical sign of an impending reversal. While the threat of increasing Mideast tension remains apparent, we continue to see a major correction on the horizon. However, at this juncture, we advise a cautious posture and will use limited risk put options to limit our risk in the event tensions begin to escalate. Should the negative fundamentals reassert themselves, the energy markets have a well-known tendency to lose hard-fought ground with little hesitation.

Recommendation–Look to purchase December put options, should futures advance back towards $23.00/bbl. opportunities.

FOCUS ON THE CORN MARKET: The daily bar chart speaks volumes. Corn prices continue to skyrocket, as reports that China plans to discontinue exporting corn creates even more demand potential for U.S. farmers. Besides the sharp reduction in domestic corn output this crop year, this export news strongly implies a solid corn market throughout the winter months. Considering the low world stocks-to-usage number, a rally to $3.00/bu. appears probable by spring. However, there are some who still feel the USDA has underestimated the crop size and will adjust the production number upward in the next Crop report due on October 10. Projections for an additional 300 million bushels are now being heard, which is considered what is needed to keep prices from trending higher. However, should Uncle Sam be unwilling to sharply increase the number from September's 9.268 billion bushels, the outlook for increased feed usage and strong exports would drop the carryover below 800 million bushels. Conversely, should the USDA raise crop production to 9.5 billion, ending stocks would easily jump above 900 million and temper some of the recent buying enthusiasm. With so much hype now in the market, concern over harvest pressure is all but gone. Ideas that a bullish report will keep farmers storing new-crop supplies in lieu of higher prices creates a markedly bullish scenario. Traders are advised to await the results of the crop estimates and be prepared for some wild volatility.

The charts reveal a solid breakout above the descending channel with a new swing objective at $3.00/bu. The stochastic remains in overbought territory, and reflects the obvious exuberance for this feed grain.

Recommendation–Facing the upcoming Crop report, we've decided that prudence dictates a temporary sideline stance.

DECEMBER WHEAT: Bullish weekly export data and spillover buying from corn and soybeans have given this beleaguered food grain a well-needed boost. However, facing strong foreign competition, and with concerns over poor Australian wheat production having abated, the path to the upside appears rocky. Nevertheless, the bulls continue to keep the faith and see strong world demand and reduced domestic corn supplies ultimately aiding wheat. Technically, we expect that the rally from the pivot point posted on October 2, should extend to the Fibonacci 61.8% retracement band near $3.80/bu. A close above $3.85/bu. would give merit to projections of seeing a test of $4.00/bu.

Recommendation–Look to buy near $3.55/bu. Sell Stop–$3.50/bu., close only. Objective–$3.80/bu.

DECEMBER U.S. TREASURY BONDS: An unexpected rate hike initiated by the German Bundesbank and renewed concern over wage-push inflation by Fed Chairman, Alan Greenspan, played havoc this week with the credit bulls. With the market already acting nervous at the 118-00 level, the Fed Chairman's comments appear rather timely. Nevertheless, with many economists seeing stable economic growth at least throughout the end of the year, and with little if any sign of inflation, this washout could turn out to be rather fortuitous for those waiting to buy a good break. The low posted today (Thursday) already has the earmarks of a pivot-point low. A close above 116-00 would be a promising sign and set the stage for another run at the 118-00 level. However, if more downside still remains in store, we'd look for support to develop near 114-00 and extend a full point lower.

Recommendation–Look to buy near 114-00. Sell Stop–113-00, close only. Objective–118-00.

DECEMBER COTTON: With the threat of Hurricane Nora having come and gone, the cotton market must again face the reality of its bearish fundamentals. Indeed, rising world cotton production continues to provide an overwhelmingly negative influence on this market. Even reports that the pace of weekly export sales is running 50% greater than last year and 42% above the USDA forecast has not made much difference. The next crop estimate is expected to reconfirm what may already know, that at 18.42 million bales, we'll be harvesting the fourth largest cotton crop on record. Following the Crop report, we'll watch for short-term developments and the onset of trade buying at these lower price levels. However, although a rebound from the 70¢/lb. level would not be surprising, the duration of any rally is highly questionable. Another 2¢/lb. could be lost if the bears continue their reign.

Recommendation–Continue to stand aside.

DECEMBER S&P 500 STOCK INDEX: Cautionary comments by the Fed Chairman concerning inflation and the stock markets high valuation has once again put the bull market on pause. A wave of EMU related rate hikes along with bearish weekly jobless claims data also helped generate concern that this now overbought index is due for a breather. Nevertheless, as investors we'll recognize the Fed's position on “irrational market exuberance,” this latest round of jawboning may have a rather fleeting effect. As we see it, a break back to 950.00 would move the stochastic back in neutral territory and most likely unleash another wave of bargain buying. Indeed, expectations of seeing the spot S&P 500 reach the 1000.00 level by year-end appear to be self fulfilling. We're looking to buy a break.

Recommendation–Look to buy near 950.00. Sell Stop–945.00, close only. Objective–1000.000.

October 9, 1997 Siegel Trading Company, Inc.

549 Randolph, Chicago, Illinois

Consensus National Futures and Financial On Line Index | Technical Corner Index

Copyright 1997, by Consensus Inc.  All American and Pan American rights Reserved. editor@consensus-inc.com

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