Here we are June 1st and the doldrums are upon us. I believe that we will have a very subdued trading climate for the rest of Summer as the world continues to digest the events of the last 6 months. My feeling is that we are reaching an exhaustion point concerning the level of distress.
Like the rats in a BF Skinner Psychology experiment, traders both large and small are moving towards the point of ‘learned helplessness’. To refresh your memory, there is an experiment where a rat in a controlled environment has a totally random experience as to when they receive a reward or a shock. Repetitive habits can not be established, because each directed action, such as stepping on a triangle for food or a square for a shock are inter-changed.
Typically, one would be able to condition an animal to learn that stepping on one shape results in a good chance of a reward or punishment. At a certain point, if there is no correlation between and action and its consequence, the rat just sits in the corner and gives up.
I think that is where a lot of pros are concerning these equity markets.
Case in point, the “fat finger” sell of 1,000 points is shaping up, after investigation, to be just a case of no liquidity. No bids at a time where there where simply more sellers than buyers.
There will be no one for Congress to trot in front of the cameras to castigate and publicly flog this time. As hard as it is to get our heads around it, computerized trading will sometimes give us 1,000 point mine shafts. I am sure one day, we may have a 1,000 point up move for no reason. That, of course, would be totally OK with the pundits. They undoubtedly would not be clamoring for an investigation of a 1,000 point up move. Its just human nature.
About 2 weeks ago, after that 1,000 point down move, a reader sent a comment asking about discounting that move. Interestingly, the market eventually was drawn back down to that level, albeit in a more controlled manner. Markets typically move in that manner. Major high and low spikes are beacons attracting further trade. Period.
I believe for the rest of the Summer we will have the stock indexes in a sideways trading range. Most likely 40 to 50 handles in the S&P500 and the Dow cash in the range of 9,500 to 10,500.
Typically the Summer months are doldrums for the stock indexes, with sideways to lower chop being the historical norm. I can’t imagine what will make this year any different.
Longer term, it seems that we will be drawn to the 50 % pullbacks I have been writing about here for a bit. 8861 in the Dow Cash and 942.50 in the S&P Cash.
As for the grains, in a nutshell, here are my feelings.
We are going to have to wait to see if this is another 1983, where we traded sideways to lower through June, made our lows for that Summer on June 30th, 1083, and then rallied like a stuck pig as we had a drought.
We’re over due for a drought. Its been 22 years. And we typically have one every 17 to 18 years.
Also, with these genetically strengthened hybrid seeds, it will be interesting if these seeds can re-bound despite a drought cycle. Perhaps the seeds will be so resilient, they really can’t be permanently killed in a growing year.
China will remain the bull in the china shop, with each cargo of corn bought causing a flurry of anticipation from the American farmer. Lets hope that China becomes as big an importer of corn as they are of soybeans. Such a permanent demand source certainly could give us a floor at 4.00 just as we have a seeming floor at 8.00 in the beans, due to China’s market demand.
Wheat, after closing at a contract low to end the month, week, etc, looks sickly. Every rally has been stomped on by the charts. Perhaps we will be looking back at 6.00 wheat, 5.00 wheat as aberrations, on our way down to 4.00 and potentially 3.50? If you can’t tell, I am very bearish short-term the wheat. Of course, if we get a drought this summer, the corn and beans will lead the way. We’ll see more spreading with Wheat getting the sell side of those transactions.
As for the beans, I am still friendly. The violent nature of the bean trade means that literally, we could break below 900 on a Wed, then come in on a Sunday night and have us on the way back to 10.00 in 2 sessions. The rallies will juice the old crop first, however as SN-SX gyrates like a Richter scale. I like owning 10.00 sep calls for 25 cents on an upside play. If we break and there is a chance to chance to buy them for less than 20 cents a bushel, I would say load up and then sit tight.
Some elevators are already paying 20 cents over looking for beans. We may have to be patient through some more back filling and sideways trade through June, but July should give you a rally to take advantage of and have our sep calls ring the cash register.
So that’s really about it. Watch the crude oil pivot around the 75.-70 dollar range, and gold dance around the 1200 to 1100 band. I think short term, the rally in gold may be long in the tooth, with a healthy correction needed to punish everyone who bought gold based on the recent fear rally. Longer term, if inflation is here to stay, you have to be friendly the metals, however.
Large debt has three paths of resolution. One is positive, and the other two, not so much. The first is to have an economy grow so damn much that the high debt becomes less relevant. We saw that during the Clinton Administration as massive new wealth was created from silicon valley… Where is that next growth engine now? Behind door number 2, we have complete renunciation a la Russia in the early 1990’s). Monty Hall US politicians favor door number 3, however, the most. Behind that door is inflation. Its the easiest way, inflate it away. Pay back that debt with currency that is less and less valuable, because there is so much of it about. However, take that to an extreme and you have South America Brazil and Argentina in the 1970’s, 1980’s and 1990’s The easiest thing for politicians to do is to print the money… Most likely, that’s what we’ll be looking at here in the USA, regardless of who sits in the Oval Office.
Civics 101, Congress controls the purse strings. Period.
As always, do you own homework, and use your stops to limit your losses.
Profits take care of themselves. As a trader, your number one job is to take small losses, so you stay in the game for the larger moves.
Good Trading
