- Chicago SRW wheat saw a classic Rubber Band Disposition play out this week as real market fundamentals continued to grow more bearish.
- November soybeans were the embodiment of using both the Wilhelmi Element and the Goldilocks Principle as we wait for the week to come to an end.
- As we wait for the last half-hour of the day/week in US stock indexes, the NBA Rule, we can also think about the differences between day traders and long-term investors.
It has been quite a week, and there is still roughly 5 hours remaining as I put digital ink to electronic paper. But as I was going over the various market sectors early Friday morning I found a number of Rules, principles, and other nuggets from the Newsom Market Analysis syllabus[i]. It wasn’t one market sector, though some subsectors of grains and oilseeds seemed to dominate conversation as the week unfolded. Equities were also in the spotlight as US economic data continued to come in better than expected as the US Federal Open Market Committee raised the funds rate once again.
One of my favorite market scenarios to watch play out is a Rubber Band Disposition. This occurs when fund (noncommercial) activity diverges from what that same market’s fundamental reads are telling us. Like a rubber band being stretched, eventually the market breaks, snapping back to its base, also known as fundamentals. Recall Newsom’s Rule #6 tells us fundamentals win in the end, so when we see this situation developing, we should be anticipating the sharp snap. If it sounds like playing with a Jack-in-the-Box, you are correct as almost always makes us jump.
This past week we saw the September Chicago (SRW) futures contract (ZWU23) rally from last Friday’s low of $6.9350 to this Tuesday’s high of $7.7725. Comparing Tuesday-to-Tuesday closes, September Chicago was 89.5 cents higher this week indicating funds were continuing to cover their net-short futures position (as reported in CFTC Commitments of Traders, legacy/futures only). At the same time national average basis was crashing, falling from 54.5 cents under September futures the first weekly close of July to 67.25 cents under September this past Tuesday evening. Additionally, the September-December futures spread closed June covering 69% calculated full commercial carry with 67% or more considered bearish. This same spread covered 81% cfcc at Thursday’s close. The bottom line is both reads on real market fundamentals were growing more bearish as the futures market rallied. However, as we head toward this week’s homestretch we see September Chicago hit a daily low of $6.89, 88.0 cents off Tuesday’s high. It brings to mind something a friend of mine used to give presentations on, Grains’ Golden Rule: First basis, then spreads, then futures.
There were a number of things that came to the surface in the soybean market this week. Throwing out the largely irrelevant August and September issues[ii], my attention has been on more heavily traded November contract (ZSX23). If we go back to last Sunday night’s open, the usual folks in the industry got their knickers in a twist as Nov23 opened 8.25 cents higher and raced to a Monday gain of 34.25 cents. I reminded them at the time of the Wilhelmi Element, though as usual it fell on mostly deaf ears across the industry. The Wilhelmi Element is named for my late friend and longtime floor report Gary Wilhelmi. Having watched markets for decades before I got to know him, he often told me, “The only price that matters is the close”. So many don’t want to remember this simple lesson, getting all worked up over where a market might open.
The second item from this week is what I call the Goldilocks Principle. This tells us daily charts are too hot, monthly charts are too cold, but weekly charts are just right. I understand how things work, and day traders like short-term charts, and that’s fine. But if I’m a merchandiser, hedger, or investor I’m not going to spend much time worrying about day-to-day moves, but instead looking at longer-term charts and studies. That’s where we are with Nov23 soybeans as we make our way toward this week’s close. If the contract finishes below last week’s settlement of $14.0175 it would complete what is called a bearish spike reversal, a pattern confirming the contract has moved into an intermediate-term downtrend. Therefore, it’s all about the close, and the weekly one at that.
All these practices fit the study of stock markets as well. Think of all the chest thumping and gnashing of teeth that occurred as US stocks closed lower Thursday. It was if thousands of Chicken Littles had come together all at once to squawk, “The sky is falling!”, ending the 13-day run of higher closes posted by the Dow Jones Industrial Average ($DOWI). The reality is US stocks did indeed close lower, for the day, but were still showing substantial gains for the month and year. We can apply both Wilhelmi element once again, along with the special NBA Rule I save for watching stock markets. Every day financial television updates us countless times that “markets are poised to close higher”, and it is only 8:00 in the morning. The NBA Rule tells us all we need to watch is the last half-hour of the session when it comes to stock markets.
Why? There is a reason those who trade stocks short-term are called “day-traders”. They aren’t investors. An investment strategy is geared for the long haul, which is also why I tend to set aside the Goldilocks Principle in my study of stock markets and focus on monthly charts instead. While I’ll continue my conversation on long-term trends in the three major US stock markets next Tuesday (August 1), suffice it to say I’m not expecting anything to change based on short-term daily charts.
[i] I’m still in the process of writing such a book, one of a few I’ve had planned for years.
[ii] Another friend proposed we should start a petition for the CME to do away with these lightly trade contracts, I move I fully support. Here the CME could learn from ICE with the canola futures market going straight from old-crop July to new-crop November.
On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
