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Commecials & Index Funds Are Long

Published on: 16:15PM May 22, 2010
 Long Wheat, Corn, Rice, Beans, Bean Oil but, unsurprisingly, short Meal. Not only are the commercials long, but this week they ‘got longer.’ Index funds followed suit, raising ownership levels in expectation of some sort of weather induced rally.

 

Trend following funds increased their short positions in Wheat by 10% & long by 2% while commercials increased their long positions 2.5% and decreased their short positions by 2%. 63% of the wheat long open interest is in commercial hands, hence is well funded; but 48% of the short position is also commercial. Bluntly put, a $1.00 rally in wheat is going to put the trend following funds in a worrisome position, but an unlikely sudden $2.00 rally will send them scrambling, likely adding another $1.00 to price as shorts are forcibly unwound.

 

Trend followers increased their Corn longs by 3% & shorts by 9% while commercials increased longs 13% and decreased shorts by less than 1%. For all that, fundies are sharply net long while commercials are nearly balanced. That leaves only small specs, also know as “weak hands” with a better than 2 to 1 imbalance short. A sudden rally that catches the small specs napping will feed on itself for a couple of days, as the weak hands unwind shorts.

 

But in beans trend followers decreased longs by 7% while increasing shorts 9%, while commercial interests increased longs by2% and decreased shorts by 4%. Bean volatility could easily eat trend-followers lunch this year – maybe dinner, too.

 

Technicals:

The weekly bean chart (continuous) has a triangle that prices broke through upwards in April. Since, prices have moved back to the support line. This is a situation that is a 2 to 1, perhaps as good as 3 to 1 favorite for a bull move. Conventional measuring techniques estimate prices to rise to between $13/bu and $14/bu.

 

The weekly wheat chart is also triangular in shape, but is still looking for a breakout. Prices below 450 would be a break-out, though during the growing season I have to think “fake out” and stand aside. A weekly close above 535 would, in theory, portend a rise to 735 on the continuous chart. What “continuous chart” means in this case is that we are looking at 535 basis July but 735 basis December, and that none of us can get paid for the difference in basis.

 

Like the other two, the weekly Corn chart forms a small triangle. A weekly close above $4 should buy a December price (see wheat above) of  at least $5. A price below $3.50 makes a mess of the chart, and, like wheat implies a much lower price that I’ll not be trading (because I don’t believe in shorting during growing season.)