General Alert: View Graph The markets aren't showing any new record levels, so let's talk about why a bull market has corrections. Most traders are in agreement, that the Index funds control the show. Cargill and other agriculture commercials still try to flex their muscles against the Index funds but in the end, all they can do is to stall the market. You would think the farmers, miners, producers, oil drillers etc. are the ones raking in large profits. Not so. Granted they are doing better then a 10 year average, but it's so hard to wrap your arms around (example) Beans that normally are $5.50 at harvest and are now $11.00. Is $11 one of the two evils, Greed or Fear? Farmers know there costs are going up with the market, rent, taxes repairs, upgrades all increase with the bull market. So it's the fear of the market going lower and missing an opportunity, which controls their marketing actions. The market savvy producers use different option strategies, puts and calls to offset risk, sadly this is only about less then 5%. Four to six weeks ago many of the active commodities were making records in Open Interest, Fund Longs, Index Funds and short as well as the Commercial short side. Most markets came off their highs and had a correction. Why? Have you ever asked yourself why the market corrected? Since this week numbers aren't showing any new records from the Commitment of Traders levels, will use this time to answer the question, Why did the market correct?... Before I begin, it's important to know the differences between the Funds. There are Commodity Funds and there are CIT Index Funds. Commodity Funds tend to fluctuate with the ups and downs of the market and must get out quickly in preserving equity. An Index Fund does not. Index Funds are made-up of Stock traded concoctions, some are ETF's others are broad based, meaning they are long a percentage of a basket of commodities. All they care about is either a percentage of pool of money or how many stock shares they are selling. The price going up or down has no true barring on how they get paid. So its fare to say the Index Fund stability has direct correlation to the performance of the stock market and its indices. Mutually Shared Destruction. As an example of this in 2008 soybeans Index Funds Longs went from 210,000 contracts down to 105,000 through the last half of the year, that's half of the contracts. During this time the futures dropped from $16 to $8, hmmm… and the stock market was also regurgitating some old grey-haired longs out of the market as well. Currently the stock market is up and soybean Index Fund Longs are at all-time highs this week. Ok, why was there a correction in the market. If you look at the CIT charts, take look at the Index Fund Shorts in red. Many analysts just look at the net, to me, that doesn't give you the full picture. As you notice the CIT shorts where mounting a scale up position, at historical record levels. Granted they are a very small percentage compared to the big brother the longs, but if you're a long buyer, either in a CTA, Small Fund Manager, or Large Long Index Fund, you might as well let the shorts play out scale up trade, it will drive the price down for a better buy and give the market some fuel to have a bounce off the lows as the CIT Shorts buy back to exit their trades. And that is what exactly happened. Take a look at Cocoa in 2008 it had the same type of CIT Short scaling anomaly, the net result was an extremely sharp break. It is so important to understand what the professionals insiders are doing, you either fight them and believe YOUR trading ideas are correct and true or your go with them. If the stock market indices look weak, but the commodity futures don’t it may be time to use an option strategy for some protection until you can determine if the indices are breaking long-term trends or not. Remember, Mutually Shared Destruction. |
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