I wanted to make a quick comment for those who don’t subscribe to my Daily Market Commentary. I am certain this week’s break in price have left many of you scratching your head.
As I reported earlier in the week in my Daily Market Report, expect significant breaks, breaks of major magnitude in the grain markets should be anticipated.
Trading professionally and being smoked on hundreds of occasions has taught me a few things through the years. One is that you need to make sure you have your life jacket on, secured and prepared to start swimming just as soon as you see everyone leaning over the same side of the boat.
As I mentioned both Monday and Tuesday in my report, the moods of the market were starting to change. Many traders had gotten themselves overextended to the long side and the market was starting to break. Margin calls were starting to hit and traders seemed a little less certain about being extremely bullish.
Fundamentally nothing had changed. Last week everyone was wildly bullish and adding positions like crazy. The buying frenzy started to dry up, and the market began giving back its recent gains. With no new buyers coming in, the market was left with new shorts entering the trade and those who were long and looking to take profits (they would also be sellers who were looking to close their long positions). With more sellers then buyers the market could only go one direction…lower.
Another important lesson I have learned is that timing is everything. You can be dead right the markets, but slightly off in your timing and it ends up costing you a fortune. You could see this one coming like a freight train down the tracks. The bulls were over extended and living large, not wanting to take on any more length and the shorts were starting to control the board. The problem was Thursday’s USDA report and the Saudi "Day of Rage" was on the same track heading our direction. The Margin call gods started to reign in their money and the bulls quickly found themselves with a tough decision. Do we hold our ground and wait for a bullish report by the USDA? Do we wait for end-users to step in and start buying? Surely a weather scare of some sort will help us out?
You see professional commodity traders have a much different mind set about trading on margin then do stock traders. Commodity traders know that the markets can quickly turn around on a dime, prices swing their direction and all of a sudden they are off margin call. Suddenly though commodity traders become much less assured about their positions when there is the chance that the markets won’t cover their calls and they are going to have to come out of their pocket and send in more money to stay in the game.
Lets just say it’s like going to the boat. You take $1,000 of cash with you and tell yourself that is all you have to loose. The pit boss gives you your chips and you start gambling. You get up early and now have $5,000 dollars ($4,000 of the casinos money) life is great you and your friends are having a blast. You realize how easy it is, recognize you are on fire and start raising your bets. The night progresses and you start to give some back. All of a sudden you look down and are under $1,000. Now you are gambling with your own money. Needless to say things aren’t as much funny and the atmosphere at the table has become much more serious. No more high-fiving with your friends, this is starting to get serious. You just gave back over $4,000. It wasn't that big of a deal though because you feel like it wasn’t really your money anyway, but this $1,000 is and there is no way you are going to let them steal it.
Rather than walking away and regrouping, you allow it to become personal, bottom line: your pissed. You start to press and begin to play scared. Which brings me to another valuable lesson I have learned through the years…"Scared Money Never Wins". If you are gambling or playing in these markets with money you cannot afford to lose, I promise you will never win.
I am sure you know how the story ends. The casino ends up taking that final $1,000 and now you have to decide just how personal you want it to become. Do you get out that checkbook and take another run at it or do you just throw in the towel and walk away?
This morning waking up to the announcement of a Tsunami in Japan may have prompted many of the bulls to simply throw in the towel. The trade had beaten them both emotionally and monetarily. They had gotten themselves overextended by holding too many positions, they couldn’t withstand the drawdown and rather than risking it all and getting out the checkbook they have decided to walk away from the table.
Will and when they return seems to be the magic question. The funds liquidate in massive proportions due to a multitude of reasons: the thought that the Chinese economy may be slowing; fear that the recent Tsunami in Japan will bring their economy to a screeching halt and demand for commodities like crude oil, copper, steel, etc, will all falter; fear that the political unrest in the Middle-East will cause oil prices to skyrocket in turn also slowing down the world economies; fear that a record crop in Brazil could devastate US grain and soy exports….
The list goes on and on, the bottom line is that the bulls made a grave miscalculation and tried to jump in the market too early. I have to believe they thought the end-users would step in and support the prices. The problem is they didn’t realize just how many bulls were in the game and just how overextended everyone had become.
Do I think we come back form this? Yes, I do. I think ending stocks are too tight. If you remember the 2008 break came after the US crop was in the bin, before it was even planted. I think in typical fund fashion the move to the downside will be overdone just like the move to the upside had gotten overdone.
I told a guy on the phone today, this market right now is like going out deep-sea fishing…you are not really sure what the hell is going to end up on the other end of the line. You really have no idea of how far or how fast they are going to take your line once they hit it. The markets right now seem to be identical. I don’t think anyone can tell you how far or how deep this set-back will be.
I do know this much, the waves are massive, and the storm is settling in, make sure you have your life jacket on and are prepared to swim just in case. If this doesn’t sound like your cup of tea, then this isn’t the boat you want to be on. Let the waters calm down and wait until you see more fisherman heading back out. You might miss out on the big one, but you will stay warm and dry spectating from the shoreline.
Look for bargains on the break, I think it is still too early to count this rally out!
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