The following information is a Web Extra from the pages of Farm Journal. It corresponds with the article "Rational Buy/Sell Actions" by Bob Utterback. You can find the article on page 48 in the Mid-February 2011 issue.
The public prefers a bull market, rather than a bear market. Subsequently, the media who wants to sell the public its information is almost always going to lean toward the bullish side. The bear, being skeptical, must give in to his natural distrust of the markets and give the bull plenty of room to roam this spring and summer. Why? China and India are changing the global landscape in regard to demand for raw products to run their industrial empire and food to feed their emerging middle class that has money to spend and desires for a higher standard of living.
1. Profits are saying it is time to be careful and not go off the deep end as the bulls start to stampede if a weather event occurs this summer!
2. In other words, a violation of winter highs or lows must be used to adjust position accordingly.
Be on the lookout for open interest (total number of contracts traded) declining. This is a strong sign the old (smart) money is liquidating and selling to new money (the public). This is not a good sight for a strong bull move.
Another market structure I will be watching is the ratio of calls to puts during this time. If the put contracts gain on the call premium, this will be a strong sign the smart money is starting to lay off risk.
The final indicator I will be watching for a market high will be the spreads. For example, the September corn (which is the first contract of the new marketing year is currently trading just below 40 cents premium to the December 2011 contract. This is an extremely rare event and occurred in 1973, 1974 and 1996. In all cases the spread topped out around the pre-planting time period and lost ground into the fall. If we were to see the spreads turn from bullish to bearish, it would be the final indicator to push hard on increasing sales.
3. Bottomline: Until supply can respond to the growing demand base, sellers need to be cautious. An all or nothing strategy can be very dangerous right now.
4. While not an immediate risk for 2011 or even 2012, in my opinion, it is in the wings and will come to haunt us down the way. If locked up in variables, I believe there is a serious risk to profitability.
I wish everyone all the luck in what could be an exciting and volatile year.
- Mid-February 2011