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May 8, 2009
Time to be aggressively short the Soybean Complex
I believe a number of commodity markets have becoming roaring
opportunities to go short, with the Soybean Complex and Live Cattle
still being at the top of my list.
After crashing from extreme record highs last year, many commodities
quite normally found a bit of a bottom during the past 5-6 months (no
market can go straight down forever) that has lately, especially this
week, spurred a lot of chatter from the "experts" and talking heads
about all the government spending being inflationary, and that we should
therefore be viewing the recent rallies in various commodities as
signaling the beginning of a new bull market in the futures arena.
I firmly disagree...I think the bear market in commodities is
far from over.
First up, I would start by saying that virtually NONE of those
same experts EVER were saying "get short!" last year. The truth is, up
until mid 2008, we were in massive speculative bubble in which prices
were rising to absolutely stupid heights, and considering the fact we
are now hardly on the verge of some rip-snorting worldwide economic lift
off, I would suggest many commodity prices are now probably
on their way back down to levels more in line with where they traded for
the past 25-30 years.
Secondly, I would say that anyone who doesn't understand, for example,
that $11.00 Soybeans (with severely lower production costs than a year
ago) will lead to monstrously ramped up acreage, from Minnesota
practically to Antarctica, needs their head examined. I've seen this
cycle too many times in the agricultural sector during my 29 years of
living with the insanity of being a futures broker...where huge price
run ups spur dramatically increased production, which then absolutely
overwhelms demand, which is then followed by two to three year price
crashes, usually resulting in prices falling ALL the way back to the
previous lows (or worse).
This 35 year chart of Soybeans is a perfect example of what I am
referring to...Believe me, all of those surges to $9.00 or $10.00 were
accompanied by tons of "expert" bullish rhetoric, both right at the
highs and then all the way back down to the $5.00-$6.00 range.
This is NOT a commodity that anybody can even remotely talk about
"peaking" in possible production. Every spring, in both the northern and
southern hemispheres, farmers decide what they'll plant and how much of
it...So what would you expect them to do with prices like these? And
what path, then, would you expect prices to eventually, or immediately,
begin taking?
Some Soybean Oil bear market histories...
I'll state again that rallies are a normal aspect of bear markets, and
with this in mind, I have provided a few historical examples of bear
markets in Soybean Oil that are almost mirror images of what we are
seeing today in Soybean Oil, and for that matter, in many other markets.
Do note that in all of these cases, rallies and/or consolidations
(perhaps lasting from two to six months) do occur, but in a bear market,
as a trader, you are supposed to be selling into, or shorting, those
rallies...as sooner or later, prices tend to resume their downward path
by then sometimes falling on what can only be described as "straight
down". Take a look at these five examples, then compare them
to what Soybean Oil looks like today...
Now here's a chart of what Soybean Oil looks like as of Friday's
close...Compare it to all of the charts above...
About the only difference I see between 2009 and these previous
years is that Soybean Oil is currently trading at 40 CENTS, as
opposed to the fact those five examples (covering almost 20 years)
expired at an average of 18.50 cents...which more or less give you
an idea of what may be where prices eventually end up...The point
is, even though Soybean Oil has come down since last July, it is
still relatively in the STRATOSPHERE, and therefore has PLENTY of
room to fall further from here.
What now follows is the same August chart with the position I would
recommend taking, immediately, with Soybean Oil having just closed
back on its highs for the past six months...
Total cost for one unit of 2 puts and 1 call is about
$3900...What I am really trying to show you is my own
perspective here...that, in my opinion, there
are EXCELLENT odds this market is either going up 6.5 cents from
here, which will allow me to get back the entire $3900 invested and
then use that money to take a new short position at higher levels,
again with the 2 & 1...Or, we'll see this contract repeat some
version of all those historical examples, and continue sharply
lower, which would then mean a potential return of 3 to 4 times that
$3900.
From a risk versus reward standpoint, I don't think it gets any
better than this:
1. We are still at severely elevated prices, which, to me, means we
are NOT going to see some quiet, whimpering sideways action.
2. Every bull market in this complex going back at least 35 years
has failed and then fallen to sharply lower levels.
3. I can therefore put my money on the table and have, I
believe, an excellent chance to recoup 100% of those funds if I am
wrong...with an equally excellent chance to make a triple (or a
double if it just trades to 33. cents) if I am at all right.
Bottom line is, though, I don't EVER know what is going to happen in
this stuff. I just try to make halfway intelligent educated guesses
about what I think is coming, then put my money, and yours, into
situations where I can manage the risks but still have what I would
call fairly dynamic profit potential...And this trade, guys, is
exactly that, and then some...Which is why I personally want to be
"all over it".
I'm on it. I may end up looking as stupid as all those
"experts" I am forever mocking...But I think this is a big
one....Give me a call if you're interested...
Thanks,
Bill
866-578-1001
770-425-7241
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