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Short-term low vs. trend change

00:00AM Oct 21, 2008
Discerning between a short-term low (or high) and a major trend change is one of the hardest aspects in analyzing commodity markets. Bottom (or top) pickers are routinely chewed up and spit out in markets, largely because they try to be frontrunners and accurately call "the" low or high. Instead of trying to peg the absolute low or high based on price, it's often better to watch market psychology and attitudes instead. Typically, when attitudes change, a price reversal isn't far behind.

Today's featured question:

Corn and soybean futures have moved well off their mid-October lows. Are lows in place?


My response:

The very aggressive drop in corn and soybean futures was likely too far and too fast. But that doesn't guarantee "the" lows are in place. Before lows are marked, traders' fears over the economy must stabilize and primary focus must shift back to fundamentals. But more importantly, there must be a change in attitude that triggers a consistent flow of money back into the long side of the market.

While we've seen the government (Fed and Treasury along with Congress) take drastic steps to calm investors' fears about the economy, more negative economic data lies ahead. Some focus is seemingly moving back to fundamentals, but there haven't been signs yet that money is flowing back into the long side of the market. Conversely, the move off the mid-October lows may be incentive for those that haven't exited long positions yet to do so, which would cause one more wave of selling pressure before markets can put in low. But the process of putting in a low should be underway.

There's little debate corn and soybean futures have fallen below "fair fundamental value" if you take a snapshot of today's fundamental picture. The problem with doing so is that futures are forward-looking and an argument can be made that the "fair fundamental value" is a downward moving target, especially if world economic conditions worsen and cause global demand to shrink. Seasonally, corn and soybeans should be working on lows. But it's hard to be a buyer based solely on the calendar in this market environment.

Even after corn and soybeans (or any commodity) have put in lows, the road to recovery may be slower than hoped. The piece of pie that is investment dollars has shrunk dramatically. As a result, it will take time to get back to investment levels seen before. Plus, commodities will have to fight with the stock market for their share of the pie. That may prove to be difficult as the sharp price break in U.S. stock indices is already being tabbed the "buy of a lifetime" by some market watchers. It likely would take a return to an inflationary environment for commodities to become the "hot commodity" in the investment world again.


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