“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)


"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat


Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


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Saturday, September 13, 2014

Large Specs Continue Playing corn from the Long Side....and Losing

I have been commenting for some time now about the apparent disconnect between the hedge fund community and their slavish devotion to computerized trading systems, which are especially fond of trending markets, and their positioning on the wrong side of a major downtrending move in the corn market.

Not only are they long, they actually increased their net long standing this past week just ahead of the major USDA supply and demand report.

Apparently, not wishing to be alone in their misery, they must have recruited some other large reportables in their quest, because that category of traders likewise increased their already net long exposure to the corn market.

Here is the chart... you tell me which way this market is trending:


Here is a look at the Commitment of Traders report as of Tuesday this past week:


Back in early May the hedge fund guys began liquidating longs when the front month corn contract was unable to scale $5.15 or so after several attempts. You can see their exit from the commodity by comparing the price chart above with their net position line on the COT chart. Down, down, down corn went with them still remaining net long, ever after scaling back exposure. That came to a halt towards the end of July when they began rebuilding long side exposure. That re-entry on the long side helped push corn back up another $0.20/bushel towards $3.80 but that did not last long. Down it went some more all the way towards $3.40 with the same group still increasing longs.

What is going on here? How could a group of traders who live by the charts and whose entire discipline of trading consists of blindly following trending markets, whether up or down, miss a move of this extent to the downside? Also, since they are typically considered "smart money" and the small, undercapitalized trader is considered the "dumb money", how can one explain that the small traders, or general public, have been on the winning side of the corn market while the "smart money" has proven to have been the "dumb money" this time around?

A few, whom I respect, have suggested that this is the result of spreads being plied by these large specs who have been buying corn and shorting wheat as the fundamentals for wheat have been even more bearish than for corn. US wheat has been expensive compared other sources and with the US Dollar strength, even more pricey.

That seems to make sense but a closer examination of the spread chart ( corn vs wheat) would seem to conflict with the idea that it was a large number of these spreads with hedge funds on the long side of corn and on the short side of wheat explaining their apparent wrong positioning in corn.

Note on the COT chart that the big move out of corn as far as net long positioning goes by the hedge funds, began in May. Now look at the spread chart and what do you see? In early May the line shoots up sharply from near 225 under and runs all the way to 140 under. Clearly corn was gaining on wheat as it narrowed its discount. But, and this is noteworthy, the gain in the corn/wheat spreads came as hedge funds were bailing out of corn



In other words, hedge funds were not buying corn but rather were liquidating longs and scaling back their exposure to the long side of the corn market even as corn was gaining on wheat. The spread was moving in favor of corn as they were getting out, not as a result of them coming in to institute fresh spread positions.

If hedge funds were positioning on the long side of the corn market because they were spreading corn against wheat, the COT report would have shown them INCREASING THEIR NET LONG exposure to the corn market ( not decreasing it as they did ) all the while the line on the spread chart was moving higher ( favoring corn). The exact opposite happened however.

Referring again to the spread chart, it topped out in favor of corn in mid-June where the spread retraced a large portion of its gains and widened out ( in favor of wheat) by some 65 cents. I think some of this was clearly tied to the events in Ukraine during which wheat experienced some big rallies as traders feared a disruption of exports from key wheat exporter Ukraine. Black Sea origin wheat is a big competitor to US wheat and the latter rallied in price as traders were concerned about more business coming the way of the US and possible "force majeure" declarations.



Those fears were put to rest, flared up again, and put to rest once more as can be seen from the up and down action in the spread since early August. For the rest of that month, the spread moved in a 35 cent range.  Late in August, it began to turn again in favor of corn and has begun to climb once again.

Looking back at the COT chart and the build back in net long positioning for the hedge funds shows an increase that began in late July and has been for the most part continuing up to this past week.


You can also see that the corn/wheat spread has begun favoring corn at the same time these hedge funds have been adding to their net long position in corn. The theory that they are net long ( and on the wrong side of the corn market ) because they are working corn/wheat spreads thus NOW has credibility because the move in the spread in favor of corn is coinciding with the increase in their net long side exposure to corn.




How long they intend to work this spread however remains to be seen. Nor does this explain why they remained such large net longs in a market that clearly broke down in May of this year and has continued to move even lower in the face of one bearish USDA report after another.

The fact is that they have been stunningly wrong about corn and while they may now be playing a spread trade with wheat that is temporarily working in their favor, at some point they are going to be hit with the fact of a massive  ( a RECORD) corn crop alongside of a record soybean crop which is going to run into issues with both STORAGE AVAILABILITY and TRANSPORTATION AVAILABILITY.

My concern for corn is what happens once these hedge funds begin to close out losing longs or reverse spread trades ( which will also result in liquidating the long corn side of the spread)? We could very well see more downside than many are expecting, even at these greater reduced price levels compared to several years ago.


 

41 comments:

  1. Thanks Dan, your thesis helps to explain some of the "insanity" with the hedge fund positioning in corn. Also the price weakness in wheat the last 2 weeks. Hedge funds must be net short wheat now? Unwinding this trade a, if that is what is happening, after it has run its course (who knows when that might be?) could be supportive of wheat but quite ugly for corn. It seems the talk of an early frost had minimal effect on the grain markets this week, but slightly more supportive for beans...Have a good weekend.

    ReplyDelete
    Replies
    1. Trinity, there will be a deuce in front of corn by Thanksgiving, maybe by Halloween.

      Delete
  2. Steve: Hedge funds still long, with bin buster crop expected combined with transportation and storage issues, you may be correct... I will be watching the weather reports! Beans already to single digits.

    Crude oil continues sliding this week - the weakness is a little surprising with the Ukraine situation and sanctions still ratcheting up. But I am not complaining. With gas prices falling, it is like a stimulus tax cut for many consumers who are on tight budgets. And with the end of the summer driving season in play, we may see continued weakness in crude until it starts getting cold and winter sets in. Geopolitical unrest is the wildcard.

    ReplyDelete
    Replies
    1. Have a look at Natural Gas Spot Price Weekly
      http://stockcharts.com/h-sc/ui
      Bouncing along on support. If the Dollar breaks out the pressure should drop it through resistance (IMHO) could leave room far a money making surge when cold weather strikes this winter.

      Delete
    2. Trinity; PM perma bulls have been dead wrong on crude like always. Said fracking was a joke for what 5 years now??? Shucks, if we opened up drilling off the East Coast and expanded things off Santa Barbara and Huntington Beach, guess where prices would head??

      Delete
    3. Yes and also ANWR in Alaska. Would make the US more energy independent and put us in a much stronger position economically. But an energy policy that would include an increase in reserves and domestic production makes too much sense!

      Delete
  3. Here's how the 1987-crash in the CRB Index is impacting global markets:

    XRT priced in various currencies is now breaking out to new highs and getting ready to go parabolic.

    http://stockcharts.com/freecharts/candleglance.html?xrt:FXE,xrt:FXY,xrt:FXC,xrt:FXS,xrt:FXA,xrt:FXB,xrt:FXF|D

    And gold is now starting to crash in every currency, including the weak yen and the euro:

    http://stockcharts.com/freecharts/candleglance.html?GLD:FXE,GLD:FXY,GLD:FXC,GLD:FXS,GLD:FXA,GLD:FXB,GLD:FXF|D

    I'm thinking copper is going to have a short squeeze since the global economy is about to start booming, and gold and silver could have a short term violent squeeze.

    However if USDX takes out 85, then all bets are off for the metals.

    ReplyDelete
    Replies
    1. Mark, the world economies are at stall speed.

      Delete
    2. The USDX blows past 85 at some point, possibly by years end or sooner
      The disintegration of the yen past 110 seems inevitable at this rate plus the euro getting stung a bit more IF the Scottish referendum is a YES vote.
      Throw in the lethargic Italian economic outoook and the pain in Spain right now and the USD breaching 85 looks like a cakewalk.

      Japan and the yen might just be the buffer or fall guy that keeps the USD propped up for awhile.

      Delete
  4. Not only are they at stall speed, but I'm curious what the Fed is planning on doing after it ends QE. Allow the USD to climb? What will that do to Interest rates? What will that do to real estate? Equities? Gold? Commodities?

    How about when we announce boots on ground in Iraq? Syria?

    ReplyDelete
  5. Steve,

    Niners tomorrow for the suicide pools?

    ReplyDelete
    Replies
    1. You have to lay the chalk I think. I have no respect for Bear defense and I have to say I do not care for Cutler either. Dan will not like that as he does not like the Prospectors at all.

      What does suicide pools mean?

      Delete
  6. It is a pool where you pick ONE Game each Week (no spreads). Once your team wins, you cannot pick that team for the rest of the season. If you lose, you are OUT! I'm debating between GB, DEN, or Niners.

    ReplyDelete
    Replies
    1. Nate, I won one of those the year Peyton beat the Bears in the Super Bowl, but we had no name for it. My pick would be Tampa; no Long, no Bradford, no chance poor tough luck Rams

      Delete
    2. didn't say they didn't, but...................

      Delete
  7. Hubert, this is your early Sunday morning over coffee read to start your day.

    You have your Bo Polny and Indian girlfriends. Well, I can trump both.

    1. Mr Spellcheck, the arrogant expert on things near and far, at least up till 2032 or thereabouts, in his latest note of interest has a new publication that is NOT available for $950. ???? Too busy pontificating on things us mere mortals cannot fathom, to hire an editor.

    2. In my inbox again yesterday was Mauldin Economics, which does not go away despite my 6th attempt at unsubscribing from his name dropping, wholesale idea leaching operations. The guy has more worldwide friends than I had freckles when I was a kid 100 years ago. In fact, the funniest observation I have of him was as a panel member on a video, he actually showed more bare calf than he did socks. Call me old fashioned but I just had to laugh. I guess he doesn't have a personal clothier at Savile Row or Barney's. lol, lol, lol

    ReplyDelete
  8. Dan,kudos to you and another feather in your hat! To wit, Mr. Spellcheck must have some minions that go to your site, because not long after my post, lo and behold, the typo was corrected. Laughter is the best medicine!

    ReplyDelete
  9. Anybody attending General Jim's Q & A session this weekend?

    My Dear Extended Family:

    I am sorry to report that I was dead wrong the last 3 years.

    - I failed to predict the longest bear market in precious metals since the end of 2002.

    - I failed to predict the longest, biggest rally in consumer, travel and leisure, and transportation stocks ever recorded.

    - I failed to predict massive deflation

    - I failed to predict the swiftest, fastest, steepest decline in the grains index in history

    - I recommended getting out of the system which proved to be a disaster for those who didn't participate in stunning rallies in stocks, corporate debt, muni bonds, and long term treasuries.

    - Bail-ins which I predicted following Cypress never happened.

    - Thousand upon thousands of jsminest posts about Egypt, Syria, Gaza, Ukraine, Iraq, etc. meant nothing and had no impact on U.S. financial markets whatsoever.

    - Throwing away perfectly good gold stocks in late 2011 proved to be the best defensive posture in the last 4 years.

    I am truly sorry.

    For my sins, I should be waterboarded on the front steps of the New York Stock Exchange, with thousands of CIGAs in attendance, as most of their retirement accounts were Madoffed.

    Sincerely,

    Jim

    ReplyDelete
    Replies
    1. The truth in Jims mind is:

      Jims got the sheep money and the sheep deeply enjoy being sheered.

      2 weeks before Buckreef first poor. I cant wait!

      it will certainly be a relief for Steven van Tongeren to learn his 550.000 salary can continue to be paid.

      After all the treasury money will run out in 3 months.

      And Joe Kahama gets to receive more cash he can deploy by showing up with the tanzanian environment minister at Woolmans farm drunk with hookers.

      Delete
  10. I haven't read the post about corn yet. I have little time and will have even less in the next months : found a "stable" job in France, starting first of october, and busy now to find a flat, a school, a kindergarden, move my family from Armenia, etc...a bit heavy program, but well, it's worth it if my kids learn to like Camembert, baguette and Bordeaux wine, isn't it?

    EUR USD.
    The bounce seems to be starting, at last, and after having precisely hit the support of the downtrend channel on the weekly time unit. Watch a few years backwards and see what happened in the same situation : it is possible that we bounce strongly and hit the top of the channel. I sold 2/3 of my short position already (not more because I'm afraid this is not over, longer term) and will wait to see if we reach that line.

    USD PLN.
    Nearly 10 continuous new highs on the weekly time unit. Here also, the USD looks like it may stall temporarily. There is a resistance near 1.2850, so little to win on the upside, but possible pullback to 1.16? Let's see how it unfolds.

    COPPER.
    3.05-3.06 was expected to be a bouncing area, and I see some interesting bullish divergences here, so Copper may bounce as well from there.

    ReplyDelete
  11. Corn.

    OK Dan, I'm adding this chart up to my perimeter for now on :)
    One thing interesting to follow on my "trading system" :
    Weekly time unit : the ET MACD has gone to new highs and is now reversing down (2 candles) while Bollinger Bands are both heading down (directional trend). IF Bollinger Bands are not converging (inf bol reversing up) within 2 or 3 weeks, I will be confirmed a quite strong trending move downwards. I'll check MACD and Bollinger Bands on the weekly time unit mainly.
    Have a great sunday!

    ReplyDelete
  12. Good Morning. Or Afternoon, depending upon which timezones various parts of your anatomy think they are still in

    Yesterday I attempted to spark a serious discussion about alternative business models which might offer attractive ways to commercialise the inanity spouted on KWN. Unfortunately, one of you decided to lower the tone of the discussion by offering to send me a selection of photographs of topless women, which for some strange reason did not especially appeal to my finer instincts.

    With this in mind, I feel honour-bound to share this Asian Interest news story with you, but not before pointing out that the Thai lady judge referred to in this article apparently has the first name "Pornchita" http://tinyurl.com/pornchita , and the Culture Minister is named Ms. "Sukumol"

    http://thaiwomantalks.com/2012/06/23/topless-painting-part-1-the-shock-and-the-irony/


    Go figure that one out!
    (and be sure to clean up afterwards, you grubby little preverts)

    ReplyDelete
    Replies
    1. I can already see next step in this artistic search : topless painting while making love. Recorded on Youtube of course, for the sake of artistic and scientific research...

      Delete
    2. So... The breast painting video and account has been terminated for copyright infringement while the male stripper is still on line while violating the same copyright.

      Pot calling the kettle black?
      Imitation is the sincerest form of flattery?
      Gender non equality for sure when it comes to cultural taboos.
      Free publicity for the TV show? Yes. Hope they got the okay from someone in MiniCult. The way the US public has been reacting to the misconduct of sports figures these days maybe a good caneing is called for. http://en.wikipedia.org/wiki/Caning

      Delete
    3. You Gentlemen are extremely rude; I almost blushed!

      (And you can't call kettles that any more - you have to say "African American")

      Delete
  13. Not to let anyone down, Roberts again at his best in proving that after all these years, he still does not understand futures. Sad.

    ReplyDelete
    Replies
    1. nice to have the sept. contracts off the board in the ag's(last fri).

      the last 2 times a soybean contract went off the board, the newly current contract rallied up largely on 'no old crop beans and meal out there' , so this will be interesting next week. continuous bean chart gets a gap down, and will it go up into that gap like the last 2 times.

      good blurb: Interesting to note, that with many in the trade carrying a US soybean carryout of over 400 million bushels, that has not occurred here in the US since the 2006/07 marketing year. In that marketing year, bean futures spent time in the $5 and $6 futures ranges.

      hedge funs have been a large short in chciago wheat for the last $1 of the move. ukraine and russia production was way up on last thurs. usda report, and due to unsettled conditions they are really moving it at a price usa can't match.

      frost looks like it was zilch and next 10 day warmer, so early calls are for weaker ags.

      seeing some CL bulls: 'divergent bottom' buy over 92.50 with a tight stop below.

      Delete
  14. corn blurb: COT reports indicate that traditional funds were very modest sellers during the week ending Sept 9th . The
    supplemental report shows this group net long 9,500 as of the 9th. I expect they are carrying a modest net short after trade
    late last week.

    Next week brings a couple big reports with beans starting with NOPA crush on Monday and the FSA planted acreage data on
    Tuesday.

    beans blurb: COT report has the funds record short 81,567 contracts or 7.6% of open interest, futures and options. The
    commercial hedger added to short positions but is still struggling to find cash grain with longs up nearly twice as much with net position up 11,125 to net long 57,209 lots.

    ReplyDelete
  15. The Australian dollar is threatening to break 0.9000 for the first time since March 19.

    Chinese weekend was soft, especially industrial production as it rose just 6.9% y/y compared to 8.8% expected. Retail sales and fixed investment was also on the soft side.

    ES hits -12 on reopen must be china, CL GC SI HG also red.

    cheerio pip pip!

    ReplyDelete
  16. Looks like gold continues to get blow torched right at the open. $5-7 dollar rallies is all we're going to see till $950.

    Selling pressure is too strong.

    ReplyDelete
  17. Yep new lows for the move in gold.

    Can only be described as an "Extraordinary Collapse" or "Meltdown" as the KWN experts put it.

    ReplyDelete
    Replies
    1. Naaah - "Manipulation" I reckon

      it's those darned "PTB" again - Cap Cap Cap Cap Cap

      Mind you, at least all the "Big Money" and "Savvy Investors" are backing up the truck and buying all they can "at these bargain prices", which explains why Gold has taken so long to fall from 1300 down to its present level (and beyond); all that money "on the sidelines" is going to drive the price right back up - just like it did last week and the week before

      Hey, for whatever reason, Gold is a busted flush right now; this might be an economically justifiable situation, it may be a manipulated situation, but it is clearly an established fact. Lord knows where we go from here - 1180 surely has to be retested, but what troubles me is not the apparent downside price risk, but the very real prospect of another 20 years in the financial doldrums

      Delete
    2. Recovering now. 1233.80 or so. Strange.

      Delete
  18. Alleluïa! Kitco is providing technical advice to the gold bugs.
    Let's start with not too complicated concepts, mind you :)

    "But, first things first. What is the market trend? That is always the first question a trader or investor must determine when examining a price chart.
    Trends can be bullish (rising), bearish (declining) or neutral (sideways). For short-term and swing traders looking to ride a trend, it can be useful to consult moving averages and trendlines to identify the trend."

    http://www.kitco.com/ind/Brecht/2014-09-12-Momentum-Traders-Are-In-Control-Of-Gold-Stay-Out-Of-Their-Way.html


    "I ain't need no stinkin' T.A" answered the knight with the golden helmet.
    My faith in real money will protect me! We shall prevail! For freedom! For glory! For death! Chaaaarge!"

    When can their glory fade?
    O the wild charge they made!
      All the world wonder'd.
    Honour the charge they made!
    Honour the Light Brigade,
      Noble six hundred! :)

    ReplyDelete
  19. After being WRONG, and WRONG, and WRONG again, promising every single time "this time, this is it! It is absolutely certain because my models (which cost my subscribers 20.000 $ per year!!!! and allow me to advertise everywhere with my profits, on Kitco, etc... in order to find more donks to steal) show it", Bo Polny is back with a vengeance!!

    Only a one day after gold broke through 1240, making him dead wrong once again on all his stupid summer forecasts, Bo Polny didn't go hide for a while! This vampire is not scared by the sun of truth. He is back with a new promise (mind you, the promise at least doesn't cost you any subscription money).
    Hey, Bo Polny even released a NEW letter for Silver forecasts, in case you'd like to be fooled TWICE!!
    AMAZING!!

    I'm not making this stuff up. I would be unable to do so.
    But reality is always going beyond fiction.
    Here we go :

    "Dear Gold Friends,

    The June 27, 2014 Public Update stated… Only the Resolute Bulls Will Be Left Standing to Experience a Moon Shot to $2000 in 2014! With Gold’s price drop the first 2 weeks of September it is now time to ask yourself, am I a still a Resolute Bulls?
    A NEW September 14, 2014 Public Update has been uploaded at BoPolnywillfuckyouallgoldbugs2020amazingforecasts.com"

    Ok, I changed the last mail address, but the rest is the exact same!
    Are you a RESOLUTE BULL!!
    LOOOL!! I love you, Bo! We all love you, here!

    Hats off, Bo. You are Evil incarnate. Your name will be forever remembered.
    If Dan's blog can shed just a bit of light of wisdom to the careless readers who come here, let it be so!

    ReplyDelete
    Replies
    1. What Bo needs, is an extended family.

      LOL.

      Delete
    2. Bo Polny is a piker compared to the little old man Harvey Organ, who is calling for $200 silver by year end and something like 8-10k gold or whatever. I am serious and saw him on a video with the Birdman Greg Hunter. Frauds, plain and simple.

      Delete
  20. This comment has been removed by a blog administrator.

    ReplyDelete

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