11-29-14 Thoughts on the post-Thanksgiving market action

Saturday, November 29, 2014

   There were a lot of strong feelings and commentary that surfaced in the wake of the Friday after Thanksgiving markets.  But, with a lot of the trade gone for the holiday, one has to recognize the possibility the market action may have been exaggerated to some degree with the volume outside of hedge fund stops/sell orders lighter than it otherwise might have been.


   The movement in many markets, grain included, was largely the result of the OPEC decision on crude oil output that came out late Thursday.  OPEC members decided not to cut output, triggering a steep collapse in crude oil prices Friday.  But, it’s important to remember the collapse came on the heels of a decline prior to Friday’s break that had already dropped from $107/barrel to $73/barrel over 5 months.  Crude prices ended Friday $7.50/barrel lower.  Much of that decline came on ideas demand had moderated because of eroding economic activity in Europe and China, while world crude output remained relatively high.  But, the lower prices will start to spur demand, offsetting some of the price weakness.  But even as some think crude prices are headed lower, we are not so sure.  Crude oil is in the window to put in a seasonal low, and maybe even a longer term cycle low.  Maybe more important, oft times when a market has a sharp move, up of down, after an extended move, the action represents an exhaustion, typically setting a market up for a top or (in this case) a bottom.  This panic selling typically comes from the last “weak longs” pitching their positions, something that is characteristic of a market approaching a low. 


   The soybean market was the grain that responded most to the decline in energy prices, with soybeans losing 30 cents Friday.  Export sales, while still good, weren’t great like they had been in some recent weeks.  Soymeal actually had some net cancelations, although shipments finally appear to be accelerating now that more product is in the pipeline.  And soymeal basis levels remain high, indicating spot demand is still absorbing all of the supply entering the pipeline.  Soybean basis levels remain good, and crush margins are still very good, although off the exceptional highs of a few weeks ago.  Technical factors might have played into the mix as well, with many technicians wanting to point to a potential head and shoulder topping pattern.  But it has not yet been completed, leaving some uncertainty as to whether it will be fulfilled.  In these scenarios, it has a so-so success rate. January soybeans need to close under $9.95 to confirm that possible pattern.  Even then, longer term indicators for soybeans hint the bigger trend has turned up as well, suggesting downside follow-through may not be as good as it might otherwise.


   And then, there’s the strong surge in the wheat market, along with the small slippage in the corn market that didn’t follow the lead of the crude oil or soybean markets.  The action in those, along with the soybeans, would suggest there may have been some inter-market spreading at play in the grains.  Corn export sales were good, while wheat export sales were mediocre again.  For the latter, the anxiety about new crops in various places in the world, mostly in the Black Sea area and the US is altering expectations about future world supplies.  Regarding corn, if energy markets are so negative, why did corn hold up, and why has ethanol demand remained robust?  The performance in the other grains suggest it may have been the more limited volume Friday that played a part in the extent of the soybean decline than is apparent on the surface.


   In the end, clearly Friday was a day dominated by emotion.  And as we suggested in the crude comments, maybe the decline in that market, as well as the break in commodity indices over the last few months were exhaustions of existing declines.  One cannot yet say we have seen the absolute bottoms in a number of markets, crude oil and commodity indices specifically, but there is a chance they could be closing in on critical lows.  Commodity indices have a semi-annual cycle that could bottom at any time.  It’s a little early, but they are in the window for the semi-annual low.  The emotion is certainly appropriate for the indices(and energy markets) to bottom.  The grains may act a little different than commodities in general.  Clearly this week’s push higher positions the wheat market to move a little higher into the next layers of resistance, $6.00 on Chicago futures and $6.50 on K.C.  And corn prices have as yet to indicate they’ve come to the end of their post-harvest rally, although $4, and above, should stop advances as well.  The soybean complex has the least positive short term picture, but even those prices, soybeans or products haven’t yet confirmed their short term trend is ready to turn down again.  But if soybean futures do turn down into the next short term cyclic low due at the end of January, nearby futures may not drop further than $9.75, and maybe $9.50-$9.60 at the most.  It’s because of the larger technical features we don’t see the soybean market having an extended decline.  Longer term indicators have turned higher, helping reinforce the possibility the early Oct. low was a 3 year cycle low.  That tends to suggest prices should remain somewhat strong at least over the next few months.