Numbers To Ponder

I had a few thoughts that I think are relative this Easter lockdown weekend.  First, apparently concern of decreased demand for chocolate eggs and rabbits worldwide is what sent cocoa lower.  Nielsen reported Thursday that chocolate confectionery sales in Britain dropped -21% in the week to March 28 from a year earlier. Also, J Gaines Consulting said U.S. Easter chocolate sales may fall "sharply" as shoppers buy fewer gifts and stay away from stores.  Instead of hording chocolate, we continue hording toilet paper. 

Historical data from Moore's shows that we should still be in Cocoa.  12 of the past 15 years, July cocoa bought April 8 and held until June 15 produces an average profit per trade of $1267.  As the world emerges out from under this Corona Virus Pandemic, I think we will see things return to a new normal rather quickly.

On the index front, retail traders have exited investments at near record levels according to Sentiment Trader.  It is 50% more extreme than any outflow in almost 20 years.  So is this bullish or bearish?  Well, this past week was the best week in stocks in nearly 50 years.

According to Sentiment Trader, "As equity fund investors pulled out this week, "smart money" hedgers have rushed in.  They're now holding more than $23 billion worth of equity index futures contracts, among the most in a decade".  This is what we are trading..... equity index futures.  

What this shows is that money is that the big boys are buying while Ma and Pop are dropping out.  This is the money we try to follow with this style of trading.  We will not time the daily wiggles perfectly and managing our emotions while using this kind of leverage is difficult, but we will certainly make more money betting on the long side.

A quick note on the grain side.  I am not ready to buy corn but I will be buying at the first sign of weather problems.  We all know the news is very bearish, but we are entering the phase when the grain markets are moved by weather scares, and we generally get at least one scare every year.  May tends to be the month affected most by these events. 

​My advice to farmers now is to sell old crop corn on basis contracts now and expect to price the futures in a month or two.  The other thing you could do is to just sell the corn now and buy it back on paper using your commodity account.  Either of these methods will bring cash into your farm while still allowing you to be long corn to capture this seasonal rally.  These types of rallies happen nearly every year and has happened every year the past 5 years.  

Weather rallies are not a function of fundamentals.  Weather rallies are a function of extreme bearish sentiment combined with the function of the market.  In the futures world, once the traders decide to exit their shorts they cannot exit.  To reverse their short position they have to buy.  The speculators who have decided corn has gone about as low as it will go buy.  This causes a pop in the market which triggers some stops.  Then the market begins climbing and other traders (like us) decide it is a good time to buy corn.  This triggers more stops and the market rallies more.  Soon you have a buying frenzy as more are wanting to participate on the long side and trapped short traders try to exit their position.  Looking at this corn chart, you won't find any better set up for this to happen than what we are given right now.  At a minimum, we should get back to the 200 day moving average.  We could get back to $4.00 with a real weather situation.

Extreme bearish sentiment is the driver for this to happen.  The table is being set to get this rally.  Any farmer I speak to is feeling beaten down.  The sentiment is as poor as I have seen.  Extreme bearish sentiment is the fuel for large market rallies.