Hey everyone, Here is my hypothesis: Price breakouts that are lead by front month contract follow through more often and perform better than price breakouts that are not lead by the front month contract. Thoughts?
I am thinking about spending a bunch of time and resources researching this hypothesis. I would like to see what others have to say about it, is it even worth testing?
Here's my $0.02 (offered at a $0.02 discount): Strength in the front-month contract (particularly relative to the back months) is typically associated with a supply shortage. Strength in the back month contracts is generally associated with higher demand expectations. Taking this VERY shaky theory one more step, "supply shocks" are more dramatic, but also shorter in length (think of a huge spike up, then a sharp recovery). "Demand" trends take longer to develop (and have more pullbacks), but could have longer "legs." This could all be complete B.S., but now you have a hypothesis to test.
Ag futures are seasonal (planting, harvest) and price is strongly impacted by weather. The demand/supply influence on the futures curve is often discussed in energy futures where demand is reflected in the front months and supply in the back months.