The most difficult jobs (brain surgeon) and/or those that most of us are unable to perform (rock star) generally pay the most. Think trading is easy? It’s potentially too lucrative to be easy.

And it seems the best trades never go easy, bringing to mind the bull soybean market of 2004.

July 2004 Soybeans

Source: Commodity.com

Early that year, based on available supply versus usage trends, I predicted the US could potentially run out of soybeans during late summer, prior to the time the new crop was available for harvest. I realize, of course, that in the history of mankind we’ve never run out of any commodity, but the price of scarce commodities can run up to levels where demand falters--the saturation point.

With July soybeans trading at around $8 in February, I wasn’t sure what price marked the saturation point, only that the market was set to surge. The all-time high for soybeans was set back in 1973 at approximately $13 per bushel. Based on short crops in both the US and Brazil and high usage levels, there certainly was no reason why that record price couldn’t be tested once again.

Well, the basic thinking was right: The market surged more than $2 higher in less than two months, from early February into March. Every one-dollar move in the soybeans futures meant a $5,000 profit or loss per contract traded. Because of a number of news stories (including reports on the spread of bird flu in Asia), the market dropped $1 into mid-April, rallied $1 into early May and then collapsed all the way back to $8 in just one month.

The fundamentals of short supply really didn’t change all that much, however. During the month of June, as the July delivery period approached and the available supply was being depleted, the July soybean futures rallied all the way back up to above $10. Basically, on just one measly contract you stood to gain (or lose) $10,000 in the first six weeks, $5,000 down and up in the next two weeks, $10,000 down and then once again $10,000 up in the following month.

Bottom line: It was a lot easier to correctly identify the underlying fundamentals than trade this crazy market. The fundamentals remained basically the same while a lot of cash changed hands in a short period of time. The reason? As George Soros once said, the ultimate overriding fundamental is what he termed “credit flows,” or what we call “money.” If news becomes too well known and too many market players load up on one side of a market, it can become top-heavy regardless of fundamentals.

Markets always overreact at the extremes, both on the upside and the downside. For many years, the common wisdom was the oil market had about $10 per barrel of excess risk premium built into the price because of hedge fund involvement. However, with the huge new demand coming from the developing nations, it wasn’t easy to predict the saturation point.

In hindsight, we now know a saturation point was reached last summer. Somebody paid $80 for the March 2007 crude oil contract last August. If that person is still holding one of those $80 contracts, he’s currently out about $25,000. Are the supply/demand fundamentals really all that different today than they were last year? Probably not by 30 percent, but then again how can you measure what the “right” price is?

March 2007 Crude Oil

Source: Commodity.com

I’ve remained bullish on the corn market, and though it’s strong, it hasn’t been as cooperative as it was for us last year. Our last closed-out trade for Futures Market Forecaster resulted in a profit and a disappointment.

How can a profit be disappointing? On January 11, I recommended that FMF subscribers buy July corn; we bought it at 392 1/4 per bushel. The timing was good--the next day, because of a bullish crop report, the market closed at 414 1/2, up the daily allowable limit. Not only was corn up the limit, it traded most of the day “locked” up the limit, meaning there were more buyers than sellers at this locked limit price. 

Post-crop report, I recommended raising our stop to 414. Here was my thinking: The market shouldn’t be able to trade below a level it was impossible to buy at previously. This rule has served me well over the years. July corn peaked at 437 two days after the crop report, then drifted lower before hitting our raised stop at 414 last Monday. That marked a gross profit of $1,087 per contract traded, but I wasn’t at all happy. My analysis indicates that corn is going much higher, and it looks as if we may have been stopped at an interim low. My stop was in a place that made sense from a technical standpoint, but in hindsight, it looks like it was the wrong place.

What to do now? If it’s a mistake being out of the market, then the way to correct the mistake is to get back into the market. Human nature being what it is, it would feel best to be able to buy back in cheaper than where you were stopped out. But this isn’t always possible. The best markets won’t stop you out at all; then there are markets you’re right on, but because of timing or other issues, you get stopped out prematurely.

It feels as if our last closed-out trade falls into this category. Based on recent market action, it feels as if it’s time to get back into the corn market again, and I like the July corn. I see the chart formation as that of a bull flag, merely a correction area within the major uptrend. Stops are still recommended because they prevent disaster at times, but they don’t always work the way we wish them to on any one trade.

July 2007 Corn

Source: Commodity.com

Success Rules

While it’s never easy, let me share with you four of my key trading rules to hopefully put this all in perspective and make it somewhat easier:

• While you’ll often be wrong, the market is always right and the trend is your friend. Just as it’s easier to paddle downstream than to work against the current, it’s easier to trade with the major trend of the market than against it.
• The commodity futures price you’re currently looking at is only a snapshot in time. It represents what the common wisdom is telling us today the consensus believes the future price will be. However, common wisdom isn’t always wisdom that will enrich you. It changes and is generally wrong (because the price today is just about never the price of tomorrow). Go your own way despite what the crowd may think.
• You may be right in the long term, but will you be there to benefit? Are you able to finance the short term or, alternatively, will you step aside if the market isn’t going your way before disaster hits? As John Maynard Keynes once said, “The market can remain irrational longer than you can remain solvent.”
• Whatever you perceive the longer-term fundamentals of a market to be, remember what George Soros told us: The most important fundamental is money, and it’s money that moves the markets in the short term.

George Kleinman is editor of Commodities Trends.

© 2007 George Kleinman
Editor of Commodities Trends
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Risk Disclaimer

Futures and futures options can entail a high degree of risk and are not appropriate for all investors. Commodities Trends is strictly the opinion of its writer. Use it as a valuable tool, not the "Holy Grail." Any actions taken by readers are for their own account and risk. Information is obtained from sources believed reliable, but is in no way guaranteed. The author may have positions in the markets mentioned including at times positions contrary to the advice quoted herein. Opinions, market data and recommendations are subject to change at any time. Past Results Are Not Necessarily Indicative of Future Results.

Hypothetical Performance

Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.