Volatility is the name of the game!
Jul 07, 2010
Volatility is the name of the game now. Higher volatility is associated with uncertainty. Since there has been such a big drop in expected acres, yield is becoming increasingly important. USDA dropped the overall crop conditions yesterday giving rise to the fear that the corn crop will not exceed last year. If this occurs, carryover will move below a 10% stock to use ratio which is the tightest it’s been since 1973. This concern has given the bulls new resolve that the market next winter will have to move well above $4.50 in December 2011 corn to entice acres into production. While they may be right, that’s next spring, not this fall. My concern is the bulls are getting very motivated a little to early and if they don’t watch themselves they could get really trapped.
The weather forecast into the middle of the month is great for corn pollination. The only problem develops as we move into the latter part of the month. As for the demand side of the equation, the concern about a double dip economic recession is still very much a risk.
While the market has bounced up to within striking distance of previous overhead resistance, it’s becoming apparent the market is not wanting to surge higher until it gets a solid confirmation of yield stress.
The final thing that is concerning the market is the big short position of the trend following funds. When will they liquidate? The market has been trying to close above the 100-day moving average which it did accomplish today. Early next week the market will be making some critical decision if it’s going to move higher.
Subsequently, anybody playing the short side of the market must be sure that your adequately capitalized at this time. If you are over trading, you need to back down a little. If you are long puts I would roll up to keep close to the market. As for selling calls, I would be cautious and postpone until we get past the July USDA Supply and Demand Report.
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