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sugar 300x190 When Technicals and Fundamentals Align

The trading environment is ripe for profits when the technicals and the fundamentals are in alignment. Admittedly, it is hard for the new trader to find good fundamentals. You can still follow the fundamental reports in the news and marry them with the price action.

Sugar is one such market. You can see in the chart above that it is in a strong uptrend. The fundamentals seem to show tightness as well. “Sugar prices exploded, hitting a five-month high in London, amid growing fears for Brazilian sugar output, which is expected to fall for the first time in more than a decade, with rising oil prices seen adding a further kicker.”

A trader needs to have his personal fundamentals and technicals in order too. It’s as important to know what you’re doing and why you’re doing it. That is the subject of my upcoming book. More on that later.

Traders like Michael Marcus or Jim Rogers who have expert level fundamental insight can trade on that information. They often put trades on long before the rest of the world takes action. They are likely to be long at the early stages of the move…when there is less certainty or proof that a move is underway or eminent.

I have a question for you: If someone allocated you $1MM in new assets for a separately managed account, how would you trade sugar? The answer is not “I would follow my rules.” A real client (someone in the know) will ask you what the expectation of a trade is for a late-stage rally, like the sugar chart above. The one you’ve been quoting people is the average expectation of all your trades.

Most of the “expert” system followers are either clueless or have a great deal of faith that a move will emerge. By buying early-stage breakouts you’re effectively saying that you have a great deal of faith that one will show up. But to say that fundamentals are not important is a completely ignorant thing to say. When you lose money trading a system, your mind will still ask “why” this happened. The answer to that question is a fundamental.

I think it’s much harder to admit the difficulty in understanding fundamentals or that it takes a decade to become proficient at understanding them, than to just trade new highs and pose as a commodity expert. Don’t kid yourself, the best commodity traders have a deep understanding of the world we live in and how commodity markets are affected by our consumption and production.

I bring this up b/c I had a conversation this weekend with someone who thought he was an expert systematized trend follower (his words, not mine). And maybe his is, but when I asked him if he was using that title/moniker to mask his insecurity about his ignorance about commodity fundamentals, he blanched, as if to say, “Please don’t ask me anything too technical about commodities.”

It’s true that you can trade without knowing too many fundamentals. My belief though is that unfortunate quote about “funnymentals” has been misinterpreted and misrepresented by would-be’s as meaning that fundamentals are not important. Nothing could be further from the truth.

You need to know build a robust trading system with Mechanica, but you need to understand the fundamentals also. Doing so will help you in your coding…

As a trader, it’s important to know why you say what you say and the emotions behind your statements. Having integrity with yourself is the first step to having it with your clients.

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Bono calls a blind fan from the audience up to the stage to play “All I Want Is You.” After the song, he gives the fan his green guitar.

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Here is my video interview with StockTwits founder Howard Lindzon about his new book The StockTwits Edge: 40 Actionable Trade Setups from Real Market Pros.

Michael Martin on Twitter

Howard Lindzon on Twitter

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globalhogs 300x219 Charts & Adendum For Barrons Article Hungry Hogs Lift Corn Prices

This blog post is an adendum to my article Hungry Hogs Lift Corn Prices in Barron’s Commodities Corner column today, I included these charts in the original draft, but we had to pull them to make room for the text. You can click on any of the charts for larger and clearer images.

The chart above offers some perspective on the global hog market. China not only has more hogs than the next 43 pork-producing countries combined, China has 1.5 more hogs than there are Americans in the United States…and they all have to be fed. (Chart source: United Nations Food and Agriculture Organization via the 2011 Milken Institute Global Conference).

china.barrons 300x174 Charts & Adendum For Barrons Article Hungry Hogs Lift Corn Prices

This chart shows the disparity between hog prices in the United States versus those in China. The reasons why are delineated in the Barron’s article. This disparity is what can lead China to import our hogs and put duress on US lean hog prices. (Chart source: Arlon Group)

china.soybeans 300x240 Charts & Adendum For Barrons Article Hungry Hogs Lift Corn Prices

The chart above shows just how much China relies on the market to meet its need for soybeans. Once they import the soybeans, the beans are “crushed” as it’s said, to create soybean oil and soybean meal. A whopping 98% of the meal is used for the 20% blend in hog feed that I mention in the Barron’s article. [Soybean oil is used for human consumption: cooking oil and salad dressing, for example.]

At the end of the day, China has only 7% of the world’s arable land, yet they consume 20% of the world’s grain production. The delicate balance between grains (corn and soybean meal) and hogs means that one outlier event, or better, one more horrible estimate from the USDA/Wasde and the whole grains/hogs complex will go parabolic.

Erin FitzPatrick, a phenomenal grains analyst in her own right at Rabobank, has much tighter expectations for the already historically-low corn stocks-to-use ratio this season. Erin’s forecast is at 4.0% (I’m with her), whereas the USDA’s are at 5.2%. To put that into perspective, that means the US is going to finish this crop year with about 7-weeks supply.

In equities, you may hear the expression, “stocks are priced for perfection.” I think that is the case for corn and soybeans in the commodity futures market where we saw limit moves this past week. Non-directional volatility, or equity whipsaws, are the norm. Therefore, I would trade small and conservatively. Don’t be a hog.

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I was on Fox Business News a few months ago for “Street Fight.” You can see for yourself who you think was more prepared. (Hint: It wasn’t the other guy.)

The President had RENEWED drilling permits that had been put on hold, they were not NEW permits that would have ultimately lead to higher supply in oil.

— The oil market needs to have Frank/Dodd enacted to put a halt to HFT. We don’t need higher fees.
— Margins have been higher for investors forever. Margins are much lower for end-users.

President Obama has put the country in a much worse situation by drawing on the Strategic Petroleum Reserves (SPR), mostly for his political benefit. The last thing President Obama wants will be high gasoline prices coming into Election campaign season. Now should we have a real emergency on our hands, we have less “dry powder” because it was spent for political capital. That’s not leadership by any measure.

Like currency interventions, trying to bolster the near term supply will not affect distant prices, and tapping the SPR will fail. Moreover, higher prices in the deferred months encourage STORAGE – which takes supply AWAY from the cash market. Why? If the front months are lower than the deferred months in the commodities calender, owners of physical crude oil are encouraged to store the crude oil now to obtain higher prices later.

The long-term drop in demand for crude oil will come from tax credits for alternative energy sources, approving near-term crude oil drilling permits, and most of all, conservation by Americans. That’s how President Obama can create an national energy policy that is efficacious now and for future administrations.

The market premium in crude oil prices above the factors of supply & demand is determined by global forces…not a central bank, nor some mystical commissar. The futures market is not supposed to be based upon supply and demand, but the threats and dangers to global supply and demand.

When all the analysis is done, hedgers and investors affect the first function of the commodity futures market which is to transfer risk between themselves willingly. In the process, price discovery occurs, the second function of commodity futures markets.

The same argument can be made for any discount the market participants determine by their collective buying and selling. Market participants include buying and selling hedgers, and buying and selling investors.

For more insight from someone other than me, Reuters analyst John Kemp has written extensively on crude oil trading and the factors involved in the overall pricing mechanism.

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