Market Thoughts 9.27.20
Dec corn lost 13’2 this week to close at 365’2. November beans lost 41 cents to close at 1002’4 as that commodity followed up its largest weekly gain in a year by recording its largest weekly loss in almost two years; more on this below. December spring wheat lost 21’4 to close at 529’6, erasing all of the prior week’s gains to land at its worst level since early August.
Once again we find ourselves at an interesting moment in what has been a truly remarkable year for people whose moods are affected by grain prices. To recap, beans launched a counter-seasonal late-summer rally on August 10th, foreshadowing what was to come by trading against the trend and news on USDA report day. By September 18th beans had tacked on 181 cents, culminating with a remarkable stretch that saw 17 of 19 sessions feature higher closes. Unfortunately, this week brought about a much-expected correction. Beans of course were set up for this given incredibly overbought levels, bearish divergence and a managed money buying binge that tacked on over 130,000 contracts of length, the sort of thing we haven’t seen since pre-trade war. Even with the stage set, there still needed to be a catalyst. That came in the form of massive pressure from outside markets at the start of the week, farmer selling as harvest ramped up and widespread reports of favorable bean yields. (Unfortunately North Dakota seems to be the exception again with the majority of our clients featuring average to below average yields.)
So what happens now? It is our opinion that the bean rally (and corn/wheat’s efforts to keep pace) is almost certainly done, or at least done in the sense that it will take entirely new fundamental news to facilitate a move above last Friday’s highs. Beans gave the same tech sell signal on Friday/Monday that corn gave a couple weeks ago as the 9 day RSI failed to make a new high on Friday even though bean futures did (bearish divergence) followed by a crossover (9 day RSI crossed below the 9 day smoothed RSI) on Monday. Add to it that this occurred at incredibly high RSI levels of around 90, after a 21% price rally and after Managed Money bought more than 130,000 contracts and there is virtually no precedent for this not signaling a major top/trend change. In other words, as we look at other instances over the past couple decades where a) a commodity price rallied >20%, b) RSI bearish divergence/crossover occurred and c) Managed Money bought more than 100k net contracts along the way; we can’t find one instance where this didn’t signal a major top. Also, the non-algorithm signal, file this one away for future reference: markets quit reacting to news that fueled the move… In this case the kerosene all along has been export sales and while the start of this week saw a continuation of daily announcements and massive volumes in the weekly sales report, neither was able to slow the selling momentum.
With this, our opinion again that it is most probable the bean rally has peaked and given the magnitude of the move beans likely decline further. With beans over $10.00, harvest sailing along and it being most probable the rally is over, it seems clearly appropriate to sell/hedge even as bullish sentiment that was raging a week ago still lingers. Perhaps if ever there was a year for “most probable” not working out, it’s 2020, the year where beans made calendar lows right before planting and highs right before harvest (along with everything else crazy about this year)… Maybe La Nina lives up to its hype and South American production issues bring the next leg higher, maybe the broader inflation/supply chain issues take over or maybe something else happens we aren’t even considering today. But if you’re a forward hedger focused on margins, we don’t like those odds enough right now given the probability and price levels we have today.
NOVEMBER SOYBEANS – Bearish divergence (RSI on middle chart trending lower before beans peaked) and bottom chart shows Managed Money Long.