Weekly Spread Commentary - Sample
 

Moore Research Center, Inc.

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Weekly Spread Commentary - Sample

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Worth the Risk?

Certain spreads have tended to be especially dynamic and/or reliable during May, even if the reasons behind the moves are not obvious.  Thus, they are always worth considering.  But one must also evaluate the risk beforehand and control it thereafter.

Consider again the forex relationship between Canadian (C$) and Australian (A$) dollars.  Subscribers will remember this same spread from the Commentary for April 13 wherein was discussed the following:

“These two countries are similar in many ways:  small populations on large land masses rich in natural resources, industrialized but export-driven economies.  But they also have differences derived in part from location:  their seasons are opposite, and Canada is closely related to the sluggish US economy whereas Australia benefits from a surging Asia.

“The Canadian fiscal year runs April-March.  Thus, the C$ has tended to decline (against the US$) into its final fiscal quarter and then to meander sideways along a seasonal bottom as Canada’s fiscal year and winter(!) draw to a close.  But almost immediately in the new fiscal year, and as spring arrives, the C$ has normally surged higher — quickly into early May, and eventually into July.  In fact, MRCI has found that September Canadian Dollars have closed higher on about July 9 than on about April 17 in 13 of the last 15 years.

“The Australian fiscal year runs July-June.  The A$ has also tended to decline (against the US$) early in the calendar year, also making a seasonal bottom by the end of March and surging higher during the first month of Australia’s final fiscal quarter.  But the A$ has often made a seasonal high in the first days of May and then declined into June.”

Again, the net effect has been for C$ to regularly outperform A$ throughout May.  And, in fact, the Long June Canadian/Short June Australian Dollars spread has closed more favorably toward C$ on about May 31 than on about May 2 in 14 of the last 15 years — albeit not without potentially painful drawdowns.  (Each minimum increment of 0.01 cent is worth US$10.00.  Brokers accept nominal spread orders between these two CME futures contracts of same size.)

The prior strategy started out well, but the spread has since pulled back to just below its optimized entry.  Thus, any traders already in this spread need first to manage their risk on that position.

The seasonal pattern illustrates how a seasonal low is most typically formed sometime between mid April and early May.  This year the C$ fell to a discount to A$ of as much as -6.36 — the most extreme since 1997, with the most extreme in at least 25 years being -7.13 — during February.  The sharp recovery since, which actually narrowed the spread to only -1.25 this past week, suggests an early seasonal low — especially given that in doing so it blew right through and then successfully retested downtrend lines drawn not only on the daily chart to connect highs of September/October and November but also on the weekly chart to connect highs of June/July 2010 and those same September/October 2011 highs.  And cycle theory says early lows suggest bullish conditions.

Even if so, however, the question now is how much further the spread may pull back.  For example, will it need to correct fully 40-60% of its move from -6.36 to -1.25?  Will it only correct back toward its mid-April chart low of -3.26?  Note that level would itself be a 40% correction back toward the February low.  Thus, this spread would seem still to be immediately bullish as long as it widens out to no more than that mid-April chart low.

As long as it holds, this spread may have both short- and long-term potential.  For most of the last 25 years, the C$ has traded at a premium to A$ — except for what appear to be major cyclic lows that have appeared every 7-8 years.

Now consider soybean oil.  Again, the bulk of the US soybean crop is harvested in October.  Thus, the USDA crop marketing year for soy products runs October-September.  Because soybean meal consumption is greatest during the cold of winter and because meal normally accounts for 55-65% of soy product value, US processors operate at capacity during harvest and through winter.  As they do, stocks of soyoil — with many competitors and substitutes — can build almost as if a byproduct.

At the end of winter, however, processors expecting both a seasonal decline in domestic consumption of soymeal and also competition from South American (SA) supplies sharply reduce their rate of crush.  Relieved of the pressure of a continuing build in supply, and with SA supplies not yet much available to export markets, soyoil has tended to rally into early May.

But shortly thereafter those SA supplies will begin trickling into the market, normally flooding it by July/August — by which time US supplies becomes increasingly burdensome to the market.  In contrast, the new crop of US soybeans is just being planted in May and will remain an unknown until June/July.  Thus, new-crop soyoil has usually outperformed old-crop at least until the crop is mostly planted.  In fact, the Long December/Short July Soyoil spread has closed more favorably toward December on about June 3 than on about May 3 in 18 of the last 19 years.  Not all years would have generated big gains, but the singular loss would have been only 0.15 cents/pound.  In only 2 of those 19 years would any daily closing drawdown have exceeded 0.15, none greater than 0.27.  (Each minimum increment of 0.01 cent/pound is worth $6.00.  Brokers accept nominal spread orders.)

This spread may (or may not) entail less equity risk, but one must still measure that risk against potential.  This year’s spread traded at a discount during last September/October (harvest) of as much as -0.73 cent/pound.  As harvest ended in early/mid November, it traded at a premium, but then for the last six weeks of the calendar year reverted to discount — which supported a return to a premium in January.  Since then the spread has crept sideways/higher into this past week when it traded as high as +0.80.  As long as the March low at +0.59 and especially the April low at +0.63 hold on any pullback, will this spread at least test +1.00 — a level exceeded in 5 of the last 6 years?

If you have not already done so, you are encouraged to visit spread charts.
(Both for future convenience and for reference to past Commentaries, you can bookmark the WSC Index.)

PLEASE REMEMBER:  These are NOT trading recommendations. They are provided for informational purposes only and are intended only as potential ideas based on the market's own performance in the past, but past performance is not necessarily indicative of future results.  Futures trading involves substantial risk of loss.

SEASONAL TENDENCIES ARE A COMPOSITE OF SOME OF THE MORE CONSISTENT COMMODITY FUTURES SEASONALS THAT HAVE OCCURRED OVER THE PAST 15 YEARS. THERE ARE USUALLY UNDERLYING FUNDAMENTAL CIRCUMSTANCES THAT OCCUR ANNUALLY THAT TEND TO CAUSE THE FUTURES MARKETS TO REACT IN A SIMILAR DIRECTIONAL MANNER DURING A CERTAIN CALENDAR PERIOD OF THE YEAR.  EVEN IF A SEASONAL TENDENCY OCCURS IN THE FUTURE, IT MAY NOT RESULT IN A PROFITABLE TRANSACTION AS FEES AND THE TIMING OF THE ENTRY AND LIQUIDATION MAY IMPACT ON THE RESULTS.  NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT HAS IN THE PAST OR WILL IN THE FUTURE ACHIEVE PROFITS
UTILIZING THESE STRATEGIES.  NO REPRESENTATION IS BEING MADE THAT PRICE PATTERNS WILL RECUR IN THE FUTURE.  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 RESULTS PROGRAM.  ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE 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 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.  RESULTS NOT ADJUSTED FOR COMMISSION AND SLIPPAGE.

If you have any questions or comments, call me at 541-484-0472 or email This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
Last Updated on Monday, 30 April 2012 06:54  
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