Perspectives on Wheat, Soybean Oil, Soybeans and Dow Index Futures
The year 2007 has been a difficult year for investors looking for opportunities in futures markets. However, I believe there are buying opportunities in several CBOT grain markets and in CBOT Dow Jones Industrial index futures.
A Challenging Year
This year, I have seen few commodity trading advisors do well. Most fund managers have seen their funds perform badly. There are a few reasons for this.
First, there are few trending markets at this time. With the exception of the CBOT Dow index, the CME Canadian dollar and Nymex RBOB gasoline futures, all markets have been extremely choppy. RBOB gasoline, an extremely volatile market, has been rising for almost six months now, with numerous buy opportunities. Dow index and Canadian dollar futures have also been rising, but it is difficult to find many good buying opportunities. I prefer to wait for the right opportunity and look to buy following one- to three-day retracements in trending markets. The Dow index and Canadian dollar markets have been going straight up, with very few down days.
Another reason is the participation of long-only funds, which has changed the overall dynamics of the futures markets. These funds have large amounts of cash and continually buy commodities across the board, never selling. They make it difficult to determine what speculators are actually doing, and they also pump a significant amount of liquidity to one side of the market.
In addition, there is a push for commodities as an asset class. A typical diversified portfolio would now include futures. Substantial amounts of money are being funneled into futures markets, flooding them with liquidity. The result is the overall volatility in the markets that we are seeing today.
Finally, the age of electronic trading has opened the door to traders that traditionally have not traded commodities. They think and act differently, and that affects activity in the markets.
Despite these factors, I have found some trading opportunities in CBOT wheat, soybean oil, and soybean futures, and in Dow index futures.
Wheat
Over the last seven months, CBOT wheat futures have traded in a range between $4.60 and $5.10 a bushel, with the exception of a spike down in April, when the July contract fell to about $4.25. Open interest is relatively low, indicating that speculators are unsure of market direction and do not have a position in the market. Commercials also are buying in many short contracts in anticipation of higher prices.
Price consolidation at the $4.80 to $5.00 area over the past two months leads me to believe that a major move is coming. Consolidations usually lead to breakouts, but the direction is almost impossible to determine.
Long-term charts show that in the mid-1990s, wheat spiked up to $7.50. A year and a half ago, wheat was around $3.00. Charts show that in a relatively short amount of time, wheat went from $3.00 to more than $5.00. Most critically, wheat has managed to hold on to all its gains, and we have not seen any sort of pullback or any sharp move downward. Resistance levels at around $4.00 have now become major long-term support areas, and wheat currently is holding at levels above them. Wheat is now consolidating between $4.88 and $5.20. This is one main reason why I believe that wheat is in a bull market. I anticipate a run toward the old highs above $7.50. I predict that such a move could take wheat to $6.00 to $8.00 by the end of summer, possibly in the August to October period.
Crop damage is one supportive factor for the wheat market. I recently spoke to some wheat farmers in Kansas who indicated that the frost a month ago most likely hurt wheat crops during a rather critical growing period. However, nobody is certain yet of the extent of damage. I caution that this is only one part of the U.S. and that these are unofficial reports. In addition, these reports came in early during the growing season.
Another supportive factor is wheat demand, which appears to be very strong globally. With the U.S. producing about 75 percent of the wheat crop, any weather disruptions nationally are likely to be detrimental to production.
This combination of factors should lead to higher wheat prices. I recommend buying futures when prices drop, but more importantly, buying options, particularly at-the-money September calls. September $5.30 calls are roughly $1,500 a piece, with an overhead price objective minimum that is double that to more than $10,000.
Soybean Oil
Soybean oil prices have been rising, possibly because of demand for biodiesel. However, the charts themselves show an upward trending market, essentially the definition of a bull market. In this market, I also recommend buying soybean oil futures on price dips. The mid- to low $0.35-per-pound area in July soybean oil looks supportive, and I believe this level represents a good buying opportunity.
Soybeans
Soybean futures are not performing as well as soybean oil futures, but they are still quite strong. Many farmers have switched from planting soybeans to planting corn instead. With corn at $3.75 a bushel, soybeans need to be closer to about $9.00 a bushel to persuade farmers to plant them. Considering production costs, corn at $3.75 and soybeans at about $7.90, a farmer will make about $100 an acre more planting corn than soybeans.
Soybean futures are at levels not seen since 2002-03, and long-term charts favor an upside move. A summer rally usually occurs, and I anticipate that this year's rally will be more demand- driven than supply-driven. I believe soybeans will test the old highs and aim for the $10.50 area by the end of the summer. My overall price objective is $10.00 to $11.00. Once again, I recommend buying futures on dips and buying September at-the-money calls. The September $8.40 calls cost roughly $1,700, and I am anticipating them to be valued at or above $8,000 by expiration.
Dow Index
The Dow Jones Industrial Average has been rising for the past three months. It is not easy to find fundamental reasons to explain this continuous upward move, but charts show a bull market.
Certain observations appear to support a continued move upward in the New York stock market. There was a record number of short positions recently, and traders there actually have been selling more stocks short. As a contrarian by nature, I do not believe the market is headed down.
In addition, a substantial amount of money lies waiting by the sidelines, as investors wait and see in which direction the market will move. They are too scared to buy, but remain smart enough not to sell short. Even the market bulls are not taking big positions in the market.
I believe the Dow Jones Industrial Average will see substantial gains this year, possibly 15 percent to 20 percent.
A trader can take advantage of such a rising market. I recommend buying Dow index futures when prices decline, even if they don't fall far from current levels at 13500 to 13600. Currently, the mid-13550s look enticing, but in my opinion, any 2.0 percent correction off the highs is worth pursuing.
Michael Hinman is a Senior Market Strategist with Lind Plus. He can be reached at 866-471-2048 or via email at mhinman@lind-waldock.com.
You can hear market commentary from Lind-Waldock market strategists through our weekly Lind Plus Markets on the Move webinars, as well as online seminars on other topics of interest to traders. These interactive, live webinars are free to attend. Go to www.lind-waldock.com/events to sign up. Lind-Waldock also offers other educational resources to help your learn more about futures trading, including free simulated trading. Visit www.lind-waldock.com.
Past performance is not necessarily indicative of future results. The trading of commodity interests entails the risk of substantial loss. Prospective investors should carefully read the Disclosure Document where applicable before making an investment decision.
*No representation is being made regarding the actual or hypothetical performance of the systems at any other brokerage firm or prior to the dates reflected above. These numbers include commissions, but not fees. Contrary to most published results, please note that these monthly returns are calculated based on closed trade profit/loss and do not include changes in open trade equity. Futures trading involves the substantial risk of loss and may not be suitable for all investors. Past performance is not necessarily indicative of future results. All information, including performance and program description, has not been reviewed or verified by Lind-Waldock.
