How are markets related?

Discussion in 'Trading' started by Joe Ross, Oct 8, 2010.

  1. Try to develop an inter-market view of how commodity markets correlate with one another. Cows eat grain, so when grain prices rise, expect higher meat prices. If meat prices go up, then so should other food prices like cocoa and sugar for candy bars.
    Orange juice, coffee, and pork belly bacon are served for breakfast with eggs, and wheat toast is often buttered with corn oil margarine.

    If the trend in gold and interest rates has been declining, deflation is prevalent; the opposite trends apply to inflation. When the prices of gold and interest rates are rising, expect almost all commodities to follow that trend, except for independent currencies and the stock market, which declines with rising rates.

    Manufacturers increase profits two basic ways without increased efficiency: lower labor and raw materials costs, or raise prices. When inflation is prevalent, higher raw material costs are passed on to higher finished product costs to maintain a fixed profit margin. The Producer Price Index, PPI, usually increases before the Consumer Price Index, CPI. Factory utilization over 85% is thought to forecast rising inflation as well.

    The USDA reports Grain Stocks in All Positions quarterly. From these estimates for total farm and non-farm supplies of corn, wheat, and soybeans, analysts calculate consumption and evaluate demand. Surprises in this report alone rarely shock the market; but, if they change assumptions about rates of usage, they can ease anxiety or instill a sense of urgency. Although future estimates of Planted Acreage can change, the acreage itself no longer can -- crops are in the ground. The baseline for calculating potential crop size is established.

    Even as the market is digesting new supply/demand figures, the CBOT Clearinghouse is issuing notices of delivery against futures. Grain markets typically suffer for several trading sessions immediately prior to First Notice Day as speculative long positions are liquidated to avoid delivery. But that selling pressure tends to be artificial and temporary. Once it dries up, the remaining longs in the deliverable contract are mostly strong-handed commercials. Bullish speculators look for opportunities to reestablish or assume new long positions.

    To avert uncontrollable risk, many traders reduce their market exposure going into major government reports, evening up their positions and avoiding assuming new ones. Likewise, commercial firms often adopt a wait-and-see attitude prior to deliveries. Further, many traders and professionals will likely opt for a four- or even five-day holiday weekend. But, just as compression precedes release, contraction in trading activity precedes expansion.