Up and Down it goes... when it slows down... nobody knows! Trading Currency is like a roller coaster... with blind fold firmly in place!!! If you think you have it figured out... THINK AGAIN!!!
"DTN Newsom on the Market
Crossed Words
Darin Newsom DTN Senior Analyst
Bio | Email | Blog
Fri Feb 5, 2016 06:18 AM CST
The importance of words was brought to light again this week as I engaged in a number of conversations on the social media site Twitter. It started innocently enough as I mentioned John Harrington's latest brilliant Sort and Cull blog post titled "The Blinding Truth About Cattle Futures." In his own style -- one that brings to mind both Mark Twain and Will Rogers -- John started his piece off with a clear-cut conclusion: "Cattle futures are seriously broken."
Market terms can be puzzling, with different people attaching different meanings to the same word. (DTN illustration by Darin Newsom/Nick Scalise)
My sharing John's column sparked a discussion between those in the cattle business (as John described them, "commercials 'playing it safe' on this strange game board taking a longer road to financial ruin") and those who trade cattle futures for a living ("wild and wooly speculators, born and bred riverboat gamblers who are absolutely addicted to the unknown"). It should come as no surprise that the former think cattle markets are indeed broken, as John does, while the latter see it only as a market doing what it "should" (more on this word later).
Let's define what makes a "broken" market. In the beginning, futures contracts were designed as a tool of passing off price risk starting with the producer of a cash commodity and progressing all the way through large cash commodity merchandisers to floor traders on one of Chicago's exchanges. The key relationship in all of this was that between the futures market and the cash market, or in other words -- basis. This allowed producers to hedge price risk in the futures market with a general idea of what basis would be at some point in the future. Changes in basis usually occurred as a result of changes in the cash commodities supply and demand, either real or imagined (e.g. harvest, weather scares, export sales, etc.).
Therefore, a futures market that is broken is one that has lost contact with its underlying cash market. Those arguing against this idea suggested we were just in an active period, that in time the market would adjust. My reply: So what? That doesn't mean the market isn't broken now.
If we go back to 2008 and use Chicago wheat as an example (though Kansas City and Minneapolis were also broken), we see national average basis fell to $2.35 under (the DTN National SRW Index was priced $2.35 cents under the nearby futures contract). The futures market was a perfect picture of insanity as domestic and global supplies were growing by leaps and bounds yet noncommercial (speculative) traders were driving the SRW futures market toward $13.50. Yes, you read that right, $13.50. Futures spreads (price difference between contracts) were in a strong carry (the nearby contract priced below the next deferred contract, the opposite of an inverse), also reflecting the commercial side's unwillingness to go along with speculation run amok.
Fast forward back to today's cattle markets and any given day can see live cattle move the daily limit $3.00 and feeder cattle $4.50, in either direction, though underlying fundamentals (supply and demand) remain unchanged. Old market triggers like this past week's U.S. Plains and Midwest blizzard would have garnered a great deal of attention in days gone by, but this time around created hardly a buzz. Instead, this week has seen some of the calmest cattle futures trade in months. Go figure.
Others pointed out that just because a market is difficult, doesn't make it broken. If markets were easy, some said, everyone would win. Again I disagree. From a technical (chart-based analysis) point of view, the cattle markets have never been easier. The monthly charts for both live and feeder cattle are near-perfect examples of markets moving from Elliott 3-Wave downtrends to 5-Wave uptrends, with trends being nothing more than price direction over time.
If this isn't enough to make grizzled veterans of the livestock trade laugh, I don't know what is. For decades, livestock contracts basically ignored Sir Isaac Newton's First Law of Motion, still the basis of nearly all technical analysis when rewritten as "A trending market will stay in that trend until acted upon by an outside force." Livestock traders had little to no use for charts, and with good reason, for the futures markets were driven by cash markets. Those who understood cash trade understood the market. Period. But such is not the case today. One has to be well-versed in the study of algorithms to understand what makes cattle move day to day.
Now comes the issue of "should." Commentators like to say how markets "should" or "shouldn't" behave; the latest example a headline from a widely read online financial market site Thursday morning "Crude Oil Shouldn't Be Rallying." In markets there is no should, because a market does what it will.
So how do I reconcile these two competing ideas (markets are broken; but markets do what they will)? Simple -- one doesn't actually negate the other. Markets can misbehave, to the point of being broken, before ultimately coming back to more rational behavior. A futures market that ignores its supply and demand long enough eventually ceases to exist because commercial traders refuse to take part any longer. Wheat faced that challenge and came back around, so did cotton to a certain degree. Time will tell about cattle futures. Both could be destined to a fate of regional cash trade only, or over-the-counter futures contracts traded away from electronic control of standard futures.
One last word pet peeve of mine and I'll close for the week. Make a new drinking game when analysts use the words "positive" or "negative." These terms are ridiculous in analysis, meaning "bullish" (something that makes prices go up) or "bearish" (something that makes prices go down), respectively. Think of it this way, a sharp sell-off (or rally) in any commodity can be positive or negative, depending on whether one is buying or selling.
Darin Newsom can be reached at darin.newsom@dtn.com
Follow him on Twitter @DarinNewsom"
"DTN Newsom on the Market
Crossed Words
Darin Newsom DTN Senior Analyst
Bio | Email | Blog
Fri Feb 5, 2016 06:18 AM CST
The importance of words was brought to light again this week as I engaged in a number of conversations on the social media site Twitter. It started innocently enough as I mentioned John Harrington's latest brilliant Sort and Cull blog post titled "The Blinding Truth About Cattle Futures." In his own style -- one that brings to mind both Mark Twain and Will Rogers -- John started his piece off with a clear-cut conclusion: "Cattle futures are seriously broken."
Market terms can be puzzling, with different people attaching different meanings to the same word. (DTN illustration by Darin Newsom/Nick Scalise)
My sharing John's column sparked a discussion between those in the cattle business (as John described them, "commercials 'playing it safe' on this strange game board taking a longer road to financial ruin") and those who trade cattle futures for a living ("wild and wooly speculators, born and bred riverboat gamblers who are absolutely addicted to the unknown"). It should come as no surprise that the former think cattle markets are indeed broken, as John does, while the latter see it only as a market doing what it "should" (more on this word later).
Let's define what makes a "broken" market. In the beginning, futures contracts were designed as a tool of passing off price risk starting with the producer of a cash commodity and progressing all the way through large cash commodity merchandisers to floor traders on one of Chicago's exchanges. The key relationship in all of this was that between the futures market and the cash market, or in other words -- basis. This allowed producers to hedge price risk in the futures market with a general idea of what basis would be at some point in the future. Changes in basis usually occurred as a result of changes in the cash commodities supply and demand, either real or imagined (e.g. harvest, weather scares, export sales, etc.).
Therefore, a futures market that is broken is one that has lost contact with its underlying cash market. Those arguing against this idea suggested we were just in an active period, that in time the market would adjust. My reply: So what? That doesn't mean the market isn't broken now.
If we go back to 2008 and use Chicago wheat as an example (though Kansas City and Minneapolis were also broken), we see national average basis fell to $2.35 under (the DTN National SRW Index was priced $2.35 cents under the nearby futures contract). The futures market was a perfect picture of insanity as domestic and global supplies were growing by leaps and bounds yet noncommercial (speculative) traders were driving the SRW futures market toward $13.50. Yes, you read that right, $13.50. Futures spreads (price difference between contracts) were in a strong carry (the nearby contract priced below the next deferred contract, the opposite of an inverse), also reflecting the commercial side's unwillingness to go along with speculation run amok.
Fast forward back to today's cattle markets and any given day can see live cattle move the daily limit $3.00 and feeder cattle $4.50, in either direction, though underlying fundamentals (supply and demand) remain unchanged. Old market triggers like this past week's U.S. Plains and Midwest blizzard would have garnered a great deal of attention in days gone by, but this time around created hardly a buzz. Instead, this week has seen some of the calmest cattle futures trade in months. Go figure.
Others pointed out that just because a market is difficult, doesn't make it broken. If markets were easy, some said, everyone would win. Again I disagree. From a technical (chart-based analysis) point of view, the cattle markets have never been easier. The monthly charts for both live and feeder cattle are near-perfect examples of markets moving from Elliott 3-Wave downtrends to 5-Wave uptrends, with trends being nothing more than price direction over time.
If this isn't enough to make grizzled veterans of the livestock trade laugh, I don't know what is. For decades, livestock contracts basically ignored Sir Isaac Newton's First Law of Motion, still the basis of nearly all technical analysis when rewritten as "A trending market will stay in that trend until acted upon by an outside force." Livestock traders had little to no use for charts, and with good reason, for the futures markets were driven by cash markets. Those who understood cash trade understood the market. Period. But such is not the case today. One has to be well-versed in the study of algorithms to understand what makes cattle move day to day.
Now comes the issue of "should." Commentators like to say how markets "should" or "shouldn't" behave; the latest example a headline from a widely read online financial market site Thursday morning "Crude Oil Shouldn't Be Rallying." In markets there is no should, because a market does what it will.
So how do I reconcile these two competing ideas (markets are broken; but markets do what they will)? Simple -- one doesn't actually negate the other. Markets can misbehave, to the point of being broken, before ultimately coming back to more rational behavior. A futures market that ignores its supply and demand long enough eventually ceases to exist because commercial traders refuse to take part any longer. Wheat faced that challenge and came back around, so did cotton to a certain degree. Time will tell about cattle futures. Both could be destined to a fate of regional cash trade only, or over-the-counter futures contracts traded away from electronic control of standard futures.
One last word pet peeve of mine and I'll close for the week. Make a new drinking game when analysts use the words "positive" or "negative." These terms are ridiculous in analysis, meaning "bullish" (something that makes prices go up) or "bearish" (something that makes prices go down), respectively. Think of it this way, a sharp sell-off (or rally) in any commodity can be positive or negative, depending on whether one is buying or selling.
Darin Newsom can be reached at darin.newsom@dtn.com
Follow him on Twitter @DarinNewsom"
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