Prepared by Phil Tiger

The CRB Index rallied to an 11- month high close at 254 on May 16th but broke 22 points to 2-year lows near 232 on July 7th. This does not bode well for the intermediate term. The index is currently correcting the oversold condition and is back to resistance near 246. The trend is neutral for now but must overcome resistance at 252 in order to turn the trend back up. A break of support at 232 would point to a test of the 1994 lows near 219 and possibly the 1992-93 lows near 197. Caution is advised.

The USDA report of August 12th was bullish for corn (for now) and negative (for now) to the December wheat/corn spread.

The 1997 corn carry out (estimated by the USDA as of August 12th at 941 million bushels with the 1998 corn carry out estimated at 847 million bushels) is positive for corn prices and possibly next year's forward spreads. Carrying charges limit the potential of the back spreads from current levels. The December/May corn spread is holding between 11 and 14 cents May premium but further gains for the back spread appear limited. Stand aside. The 1998 May/December corn spread has been holding near 12 cents May premium but might be expected to favor the May in consideration of the higher demand and reduced carryout for '98.

Wheat/corn spreads have been again favoring wheat but have bumped into resistance at $1.30 wheat premium. Hold the two long December wheat/short December corn spreads from $1.13¾ cents (June 16th) and $1.03 cents (July 14th) for an average of $1.08<$E3/8> wheat premium. The stop is nominally at 93 cents wheat premium for both positions. The objective is a move to $1.55 to $1.80 wheat premium later in the year. There is a strong seasonal favoring December wheat over corn during the second half of the year.

Intradelivery wheat spreads remain weak. The September/March wheat spread has slipped to near 26 cents March premium. While carrying charges will inhibit further gains for the back spread, the forward spread appears to have at best, limited potential. Stand aside.

Intermarket wheat spreads have also been choppy. After favoring Minneapolis and Kansas City over Chicago, a reaction in favor of soft (Chicago) wheat occurred and the spreads have turned neutral. The December Minneapolis/Chicago wheat spread set new contract highs of 34 cents Minneapolis premium (July 21st) but has since slipped to near 17 cents Minneapolis premium where support was evident. Stand aside. The December K.C./Chicago wheat spread had also slipped to support at 3½ cents K.C. premium (July 8th) after highs were made on April 21st at 24¼ cents K.C. premium. The spread is now near the middle of that range. Fundamentals appear to favor the Minneapolis and K.C. over Chicago wheat. Further weakness in the spreads might warrant a long December Minneapolis (or K.C.)/short Chicago wheat spread.

The soybean complex had been very weak but then rallied on the July 11th Crop report and subsequent dry weather. Recent highs were made on the August 4th opening at $6.67 (November) but were followed by a measurable sell off. The overall trend remains down. The carryout estimate (per the August 12th USDA report) is at a tight 125 million bushels (with next year at an ample 305 million bushels). This leaves virtually no room for any crop problems or greater- than-expected demand between now and the new-crop arrivals (late September). However, the new crop is doing well following timely rains this past week. Profits of 26 cents were taken on the short September/long November soybean spread at 28 cents September premium on August 4th. The spread remains just above that level. A rally back to 50 cents or more September premium might warrant reinstatement of the spread (again). Note that new-crop beans are usually available before the expiration of the September contract. Only 1973 and 1977 saw September premiums over November greater than recent highs. Next year's old-crop July/new-crop November '98 soybean spread is trading and had firmed to near 35 cents July premium before slipping back to near 17 cents premium July. Aggressive traders may wish to consider the back spread on a rally to or above 35 cents July premium for a move to even money to a 20- cent discount by the end of 1997. The carryout should expand considerably once the current abundant crop is harvested.

Crush values are steadier with values for September near 86 cents, October near 86 cents, and December near 76 cents. Soy oil product values are barely steady with September through December between 32% and 36% with the nearer months weakest. Soy oil spreads remain weak. The December/May soy oil spread is holding near 60 points May premium. Stand aside.

Soybean meal spreads are barely steady. The January/May meal spread had slipped to near 150 points January premium but is now holding near 300 points January. Orders have been placed to buy January/sell May meal at even money. Use a 400- point stop with the first objective at 500 points January premium and 700 January possible. Look for a seasonal move in favor of January into the fourth quarter of the year.

The January soybean meal/soy oil spread had rallied to near $7,400 meal premium (contract value) but has slipped back to near $6,200 meal premium. Stand aside but keep an eye on this spread for an opportunity to buy January meal/sell oil on a dip below the $5,500 meal premium level in the period just ahead.

Meats and meat spreads are steady/mixed with forward spreads in cattle and hogs firm but staying within recent ranges. The October/December cattle spread has tested the recent 6-month highs near 150 points December premium but failed to make new highs. Traders who are long December/short October cattle from near 175 points December premium should hold with the stop lowered to 145 points December premium. The first objective is at 250 points December premium with 300 December possible.

Cattle/hog spreads remain in a choppy trading range but have been favoring cattle of late. The October cattle/hog spread had a low near 800 points hogs premium (April 24th) and has since rallied as much as 600 points in favor of cattle. Stand aside but favor long cattle/short hogs on dips.

Hog spreads are choppy. The October/December hog spread generated a new high at 435 points October premium on August 1st but has set back 100 points since then. Aggressive traders who are long December/short October hogs from near 425 points October premium should hold with the stop lowered to 450 points October. The first objective is at 200 points October premium with even money possible.

The August belly/hog spread set a high on May 22nd at 1,335 points bellies premium. The spread then broke to as low as 300 points hogs premium and then bounced back to near 600 points bellies premium before falling back to near even money. The February belly/hog spread has rallied to 860 points bellies premium from the July 14th low of 25 points premium bellies and is holding near the highs. Keep an eye on this one for an opportunity to buy February hogs/sell bellies at 1,050 bellies premium in the period just ahead. A move back to the lows is anticipated. The old-crop August/new-crop February belly spread remains in a trading range between 600 and 1,300 points August premium. Stand aside as time is running out.

T-bonds continue their correction with appropriate effects on both the MOB and NOB spreads. The September MOB spread is eking out new highs near 202/32nds Muni's premium as this is written. Support lies near 170/32nds Muni's premium. Stand aside at current levels but the market may be building a top. Begin watching the December MOB (currently near 167/32nds Muni's premium).

The September NOB spread broke on the July rally in T-bonds with new (recent) lows being established on July 31st at the close of 184/32nds T-bonds premium. The break in the T-bonds since the beginning of August has resulted in a bounce back to 120/32nds T-bonds premium. Long September 10-year notes/short T-bonds was established on July 3rd at 124/32nds T-bonds premium and liquidated on July 17th at 155/32nds T-bonds. The spread has since returned to the 124/32nds area. Begin watching the December NOB spread (currently trading near 114/32nds T-bonds premium). A long December 10 ten-year note/short T-bond position (NOB spread) will be considered on a set back.

The September TED spread remains quiet and barely steady with values 5 points below the contract high of 67 points T-bills premium. This represents only a 10-point increase since February. Further gains though possible, are not likely without a measurable increase in short-term interest rates. The December TED spread has also settled down near 70 points T-bills premium–down from the April highs near 110 T-bills and following the lead of the September spread. Stand aside at current levels. The September/September '98 (calendar) Eurodollar spread has bounced back from the undervalued levels seen a few weeks ago. The spread was at a low on July 31st at 29.5 points premium the nearby but has since bounced back 25 points to 55 premium September '97. Those who initiated the forward spread near 30 points to the nearby took 20- to 25-point profits. Stand aside.

The September S&P 500/Value Line spread has been favoring the Value Line since the highs of July 24th, near 11,800 points S&P premium. Though the overall trend still favors the S&P, August is a seasonal time frame for at least a temporary market top. If this comes to pass, it would likely favor the Value Line over the S&P. The temptation is still to pick a top (i.e., buy the September June Value Line/sell the September S&P) at levels near 11,000 points S&P premium, the trend is decidedly in favor of the S&P. Stand aside for now.

Currency spreads (crosses) remain choppy. The U.S. Dollar has been steady to strong but the Japanese Yen is maintaining strength versus the Continental currencies. The September J-Yen/ Deutschemark spread is up against its highs near 3,275 J-Yen premium but has not been able to decisively penetrate that resistance to the upside and has slipped as low as the 3,050 J-Yen premium level. Stand aside for now.

The September J-Yen/Swiss Franc spread has a similar pattern to the J-Yen/D-mark spread as a high was made at 2,090 points yen premium on June 11th and August 8th. The spread has slipped as low as 1,700 points J-Yen premium. The spread is now back near 2,075 J- Yen premium. Stand aside here as well.

The September Swiss Franc/D-mark spread had rallied to near 1,300 points Swiss premium since the beginning of July (about 100 points) with the Swiss Franc premium over the D-mark then near 23%–an historically high Swiss premium. Long September D-mark/short Swiss Franc was established at 1,250 points Swiss premium on July 15th. A 50-point trailing stop (contract high of 1,300 Swiss Franc from May 20th and July 23rd) is suggested with the first objective at 1,180 Swiss (achieved) and 1,050 Swiss Franc premium possible. A Swiss Franc premium near 20% is expected.

Precious metals are barely steady. The spot gold/silver ratio is back above 73. The ratio is expected to favor gold over the longer term with 80-85 the objective. The October platinum/gold spread rallied to new highs again on August 4th at $140 platinum premium. Those long October platinum/short gold should again raise their stops to $105 platinum premium or take profits. Otherwise, stand aside.

Copper and copper spreads remain weak though spreads appear to be stabilizing. Spread values are little changed with values for the December/May spread holding near 300 points December premium. Stand aside in the copper spreads for now but keep an eye on the December/May copper spread for a potential back spread on a rally to 500 points or more December premium. A seasonal low in October-November might be anticipated.

New York softs are mixed. Coffee remains two sided albeit with a bullish bias. The September/December coffee spread set a new contract high on May 29th at 4,500 points September premium but then dropped to near 1,250 points September before turning up to near 2,500 points September premium where it remains. The December/May coffee spread has a similar pattern having rallied to 2,800 points December premium from a mid-July low near 1,100 December. The trend has turned in favor of the nearby with the winter demand period in front of the market. Aggressive traders should consider the long December/short May coffee spread on a break to near 1,800 points December premium for a move to 2,800 points or more December premium. A nominal 300-point stop is suggested.

Cocoa has weakened but cocoa spreads appear to be bottoming. The September/March cocoa spread set new contract lows on July 25th at $89 March premium and remains in a down trend though values have rallied $18 off the lows. The December/May cocoa spread is holding near $52 May premium. Stand aside.

Sugar had steadied but spreads remain weak. The fundamental outlook remain negative. The October/March sugar spread dropped to a new contract low once again on August 11th at 28 points March premium. Stand aside.

The September/November lumber spread is in a broad trading range with support near even money and resistance above 1,000 points September premium. Stand aside but begin watching the November/January lumber spread (currently near 160 points January premium).

December cotton generated contract lows on July 14th at 73.20 and remains near that level. The spreads have been mixed with the October/December cotton spread firm with 7-month highs set on August 4th near 22 points October premium. This was up from the May 6th low of 115 December premium. Aggressive traders might wish to consider a long December/short October cotton spread for a seasonal move in favor of the back spread and perhaps a test of the contract lows. Longer term, traders should consider the long December/short March cotton spread on a further dip to 150 points March premium. This limited risk (carrying charge) spread has seasonal potential to favor December into the harvest period.

Hold the long September/short January FCOJ spread from 500 points January premium (May 27th). Seasonals favor September into summer and especially at 500 points or more premium the back month. The spread began to firm in July and has established an uptrend. Hold the spread with the stop raised to 600 points January. The objective remains at even money to a September premium. Note that this spread should be liquidated not later than the end of August.

The entire energy complex has stabilized and rallied following the June lows (with the exception of natural gas which had a March low). September unleaded gasoline has managed to generate a new contract high (August 4th at 67.00) as has September natural gas (August 11th at 2.600). Nearby petroleum complex spreads have been mixed with nearby crude oil spreads weak, September/December heating oil making 4-month highs (and then slipping down to recent lows), and the September/December unleaded gasoline spread generating new contract highs near 800 points September premium (August 4th) before slipping back 300 points. The September/November natural gas spread remains steady/firm. The long December/short March heating oil spread has also favored the nearby–gaining 150 points in the past 3 weeks though here too, a subsequent break to recent lows occurred. Stand aside in the intradelivery spreads for now.

Hold the long December heating oil/short unleaded gasoline spread from 150 points heating oil premium (May 15th) (currently, the spread is near 50 points heating oil premium). The spread has excellent potential for a move to 500 points or more heating oil premium later in the year. A nominal 250-point stop is suggested initially. Orders have been placed to buy January heating oil/sell unleaded gasoline at 50 points heating oil premium (currently near 100 points heating oil premium). This spread might be the better candidate for an add on position though the entry point may need to be raised. A stop at even money is suggested with 500 points or more heating oil premium the objective.

August 18, 1997

Tiger On Spreads

P.O. Box 1414,

McLean, Virginia

Consensus National Futures and Financial On Line Index

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