Prepared by Phil Tiger

The CRB Index continues choppy but firming. The index broke briefly above resistance at 246 on October 3rd only to fall back below that level but the action did provide for potential uptrend development. The area of CRB: 236 to 242 should now provide support, but a sustained uptrend would require sustained price work above the 246 level and particularly a move above 252. A seasonal low for the CRB Index in the October- November time frame would not be unusual, but confirmation is needed.

Grains and oilseeds remain choppy. The quality of the corn and soybean crops has been improving and harvest is underway. Weather has been positive to final crop development and harvest. The October 10th USDA Crop report could be important as it solidifies ideas of crop size and 1998 carryout.

The 1998 corn carry out is estimated by the USDA (September 12th) at 864 million bushels. This could be a positive for corn except that exports have been mediocre compared to last year. Corn stocks (per the September 30th USDA report) were indicated at 884 million bushels–a neutral figure. The 1998 old-crop/new-crop spreads have continued to weaken. Carrying charges limit the potential of the back spreads from current levels. The December/May corn spread is still holding between 12 and 15 cents May premium, but further gains for the back spread appear limited. Stand aside. The old-crop May/new-crop December '98 corn spread had slipped from near 20 cents May premium (August 25th) to near 1 cent May premium (September 30th) and is now holding near 5 cents May premium. Stand aside for now but consider the long May/short December corn spread near 2 cents May premium. A 4-cent stop is suggested with 10 to 20 cents May premium the objective. Note however, that a major move in favor of the old-crop May (or July) is unlikely before the 2nd quarter of 1998.

Wheat/corn spreads have turned down with the December relationship dropping as low as 88 cents wheat premium. One of the two long December wheat/short corn spreads was liquidated on October 1st for a 17.5-cent loss. The other spread (from $1.03 wheat premium) was, liquidated on October 7th at 89¾ cents wheat premium for a disappointing 13¼-cent loss. The seasonal is for December wheat to gain on corn into November, but it appears to have peaked early this year. The next trade to look for in these relationships is to buy July corn/sell July wheat on 4th quarter strength. Keep an eye out for such a rally, but stand aside for now.

Intradelivery wheat spreads remain weak. The December/May wheat spread has dropped to near 22 cents May premium where some support is evident. While carrying charges will inhibit further gains for the back spreads, the forward spreads appear to have at best, limited potential. The old-crop May/new-crop July wheat spread is trading near a weak 2 cents July premium. Stand aside.

Intermarket wheat spreads remain firm more from weakness in Chicago wheat than strength in the outside markets. The trends is moderately positive for Kansas City versus Chicago wheat and quite positive for Minneapolis versus Chicago wheat. The December Minneapolis/Chicago wheat spread has rallied from near 18 cents Minneapolis premium (July and August) to a new high at 37 cents Minneapolis (October 6th). The December K.C./Chicago wheat spread had firmed to near 13 cents K.C. premium from the September 2nd low of 4 cents K.C. premium. The spread has slipped 3 cents in the past week. Stand aside in both K.C. and Minneapolis versus Chicago December wheat spreads for now as they appear rather rich.

The soybean complex is in a choppy trading range, but has been performing well of late. The overall trend is neutral. The 1998 carryout estimate (per the September 12th USDA report) is at an adequate 285 million bushels but that number could become smaller if demand continues at a pace ahead of a year ago. The September 30th stocks report indicated stocks of 132 million bushels–a somewhat negative figure. There is no evidence of any harvest problems at this time. The November forward soybean spreads are barely steady. Hold long November/short March soybeans from September 15th at 9 cents March premium. A nominal 5-cent stop is suggested with a November premium anticipated. The January/July bean spread had slipped to near 23 cents July premium, but is trying to bounce back. Next year's old-crop July/new-crop November '98 soybean spread has slipped back to near 20 cents July premium. As harvest proceeds without difficulty, 1998 spreads can be expected to favor the back months into November. The carryout will expand once the current abundant crop is harvested. Stand aside in old-crop/new-crop bean spreads for now.

Crush values have eased with values for October near 74 cents, December and January near 68 cents, and March near 56 cents. Soy oil product values are steady with October through March between 36.6% and 38.2% with the nearer months weakest. Soy oil spreads are steady but little changed. The December/May soy oil spread is holding steady near 50 points May premium. Stand aside, but watch next year's May/December '98 soy oil spread. Orders have been entered to buy May/sell December '98 soy oil at 20 points December premium. A nominal 20-point risk is assumed with a May premium the objective.

Soybean meal spreads have weakened. The January/May meal spread rallied to near 900 points January on September 5th, but has set back to near 300 points January. Stand aside for now, but begin watching the March/July meal spread for a potential seasonal back spreading opportunity on strength within the next 90 days (currently near 200 points July).

The January soybean meal/soy oil spread had rallied back to near $7,200 meal premium (contract value), but then slipped to support near $5,500 meal premium. Stand aside for now but the long meal/short soy oil spread will be considered on further weakness.

Meats and meat spreads are mixed. Cattle are barely steady while hogs and bellies remain weak. The December/February cattle spread is holding support between 275 and 300 points February premium. Hold long December/short February cattle (from 275 points February premium on September 2nd) with a 50-point nominal stop and the objective at 100 points February premium.

Cattle/hog spreads remain in a choppy trading range. The December cattle/hog spread is oscillating between 100 and 400 points cattle premium. Stand aside, but favor long cattle/short hogs on sharp breaks.

Hog spreads have been easing. The December/February hog spread has highs near 180 points December premium, but slipped last week to 6-month lows near 35 points December. Stand aside here as well though one could expect support near even money. Continue to watch the April/July hog spread (currently near 450 points July premium with a high near 125 points July) for a back-spreading opportunity. This is the most reliable of the hog spreads and can be expected to decline to 500 to 700 points July premium. Be prepared to initiate the back spread on a rally to near 200 points July.

The February belly/hog spread had slipped to new lows near 190 points hogs premium (September 23rd), but has bounced back to a belly premium. Keep an eye on this one for an opportunity to buy February hogs/sell bellies on a rally above 600 points bellies premium for a move back to the lows.

The November/January lumber spread remains weak near 600 points January premium. Those who were back spread took profits near 600 points January premium. Stand aside. Note that seasonal lows are usually generated by mid-October.

December T-bonds rallied and generated a new high at 118-18/32nds (10/3) followed by a reversal to the downside and an unchanged finish. The rally favored T-bonds for both the MOB and NOB spreads however both spreads were essentially unchanged by day's end. The December MOB spread is testing the recent reaction lows of 138/32nds Muni's premium as this is written. Strength for the MOB spread is anticipated. Support lies near the recent lows. Longer term, the December MOB spread is probably headed for the September MOB highs above 70 (224/32nds Munis premium). Aggressive traders who are long December Muni's/short T-bonds from near 135/32nds Muni's premium should hold with the stop below the point of entry and the first objective at 164/32nds Muni's premium.

The December NOB spread broke to new (recent) lows on 10/7 near 199/32nds T-bonds premium. A long December 10-year note/short T-bond spread (NOB) was established at 17-5/32nds T-bonds premium on September 24th. A nominal stop of 24/32nds is being used with the first objective at 128/32nds T- bonds and smaller T-bond premiums possible. Note that the cash 30- year T-bond is yielding 6.26% while the cash 10-year note is at 5.96% as this is written. This should favor notes over bonds.

The December TED spread remains firm with values near recent highs of 84 points T-bills premium. A significant move in the TED spread is not likely without a measurable change in short-term interest rates. Long December Eurodollars/short T-bills (reverse TED) is being considered at current levels. A nominal 8-point stop will be used with the objective below 72 points T-bills premium. Also keep an eye on the December '97/December '98 (calendar) Eurodollar spread (currently near 23 points premium the nearby). The forward spread should be considered at current levels for a move to 50 points premium the December '97. A 6-point stop is suggested.

The December S&P 500/Value Line spreads found support near 5,500 points S&P premium after favoring the Value Line for nearly 2 months. The highs were set on July 24th near 11,800 points S&P premium. The overall trend which had been favoring the S&P is now in favor of the Value Line, but becoming neutral with values now near 7,400 S&P premium. The temptation is to buy the December Value Line/sell the December S&P on a further rally to levels near 10,000 points S&P premium for a move of 4,000 points in favor of the Value Line. Note that this is a high risk trade.

Currency spreads (crosses) remain choppy. The December Japanese Yen/Deutschemark spread has slipped to 5-month lows near 2,530 points J-yen premium. This level should be where support is evident. The trend has been favoring the D- mark, but longer term, that is likely to change in favor of the J- yen. Keep an eye on this one, but stand aside for now.

The December J-yen/Swiss Franc spread has a similar pattern to the yen/D-mark spread. Recent (4-month) lows near 1,300 points JY premium should uncover support. Longer term, a shift in favor of the J-yen is expected. Stand aside for now.

The December Swiss Franc/D-mark spread has established a trading range bounded by 1,180 and 1,320 points Swiss Franc premium. The Swiss Franc has approximately a 23% premium over the D-mark at the upper end of the range and near 19½% premium at the lower end of the range. A Swiss Franc premium above 20% is historically high. Entry into the long D-mark/short Swiss Franc December cross is being considered if the current rally can extend to near 1,300 points Swiss premium (currently near 1,250 Swiss Franc premium). Longer term, the D-mark should be favored.

Precious metals are steady with silver still leading the way to the upside. The December Gold/Silver Ratio had slipped to new lows near 64 (a 4- year low) but has found support at that level. The ratio is expected to favor gold over the longer term with 80-85 the objective, but silver is in the driver's seat for now. The October platinum/gold spread has bounced off the recent lows (near $80 platinum premium) and is firm near $95 platinum premium. Stand aside but begin watching the April relationship (currently near $84 platinum premium).

Copper and copper spreads are barely steady. Seasonals point to a low in the October-December period. The December/May copper spread set a new low near 75 points May premium on September 16th, but has bounced back to a 40-point December premium. Aggressive traders should consider the back spread: long May/ short December copper near 100 points December premium. Use a nominal 100-point stop with the objective at 100 to 200 points May premium. Continue to watch the May/December '98 copper spread for a potential seasonal low within the next 60-90 days and a forward spreading opportunity at a December premium (currently near 50 points May premium).

New York softs remain mixed. Coffee is two sided. The December/May coffee spread found support at 1,600 points December premium with resistance above 2,500 points May premium. The overall trend is neutral. The winter demand period lies in front of the market. Aggressive traders who are long December/short May coffee from near 1,650 points December premium should hold for a move to 2,800 points or more December premium. The nominal stop can be raised to 1,600 points December. The December/March coffee spread is similar but with smaller numbers. Those long December/short March coffee from near 1,100 points December premium should hold for a move to 2,200 December premium. The stop can be raised to 1,050 points December.

Cocoa and cocoa spreads appear to have bottomed. The December/May cocoa spread had slipped to near $60 May premium before stabilizing while cocoa had set new highs. Stand aside for now, but keep an eye on the '98 cocoa spreads for a potential forward spreading opportunity.

Sugar and sugar spreads remain weak. The fundamental outlook remains negative. The March/October '98 sugar spread set new lows near 7 points October premium on September 25th. The spread has bounced back to resistance above 25 points March premium. Stand aside for now, but consider the back spread on further strength.

December cotton generated new contract lows (October 7th at 70.80) again. The spreads are weak. Those short October/long December cotton from an October premium took profits at 250 points December premium. Orders to buy December/sell March cotton have been canceled as the market structure is quite weak and time is growing short. Stand aside in the cotton spreads.

Watch the March/July FCOJ spread. This spread tends to favor March during the turn of the new year and especially when July is at a 550 point (or more) premium to March (as it is now). Fundamentals appear to be negative. Nevertheless, the forward spread should be considered on further weakness.

The entire energy complex rallied on Middle East tensions this past week with some correction apparent in all components on Monday. Supplies appear to be ample and (to date) there has been little to disrupt the flow of Energy into the marketplace. Nearby petroleum complex spreads have rallied and especially crude oil. Product spreads are at best, steady. The long December/short March heating oil spread is holding most of the recent gains and remains near 50 points December premium as this is written. Stand aside though some further seasonal move in favor of December is anticipated with a 100 points plus December premium the objective.

Hold the long December heating oil/short unleaded gasoline spread from 150 points heating oil premium (May 15th). The spread has rallied more than 200 points off the lows of 179 points unleaded gas premium (September 2nd), but has done little in the past few weeks. The spread will be liquidated on further strength as fundamental considerations appear to be negative in spite of the seasonal which would favor heating oil in the period just ahead. Raise the stop (close) to 50 points gasoline premium.

Hold long January heating oil/short unleaded gasoline spread from 80 points heating oil premium (August 20th). The spread has been holding just below point-of-entry. Raise the nominal stop (close) to even money. 500 points or more Heating oil premium remains as the objective.

Note the seasonal tendency that favors the forward spreads in natural gas during the 4th quarter of the year. The December/March natural gas spread has already moved from July lows near 150 points premium December to highs near 740 points December premium (September 25th). The spread recently corrected to near 525 points December premium. Aggressive traders may wish to initiate the forward spread on a further set back to below 500 points December premium. A nominal 100-point stop is suggested with the objective of 700 to 900 points December.

October 13, 1997 Tiger On Spreads

P.O. Box 6441, Chicago, Illinois

Tiger On Spreads
Spread Trading
The Spread Trader
Consensus National Futures and Financial On Line Index

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