Carbs to make a comeback?

Trader sentiment on the grain complex (corn, wheat, rice and especially oats) has been very bearish for weeks, but prices have stabilized and RSI is turning up. This could be the set-up for decent rally, especially if general risk appetite comes back for a couple of weeks.

Here’s a chart of wheat going back to 2003, weekly scale:

TD Ameritrade

And here are oat futures:

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You can see in these that the grain complex went through a mania in 2007 and early 2008 with the rest of the commodities, but that froth was quickly blown off in the crash. Prices are in rather neutral territory on a longer-term basis, which you can see for yourself by checking 25-year charts on indexmundi.com or futures.tradingcharts.com.

Strapping on the feed bag

I like the looks of the grain complex here. Corn, soy, wheat and oats are all pretty oversold, and if an oscillation pattern holds, there could be a rally right about now. Also nice that their rates of decline have flattened out a tad.

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Here’s a closer view, a 1-hour scale of the last month:

Source: Interactive Brokers

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The whole commodity complex is short-term oversold, and grains should benefit from any bounce there. They are also likely to tag along with any continuation in the stock rally.

Long live the dollar!

Dollar index here, with my annotations of readings in the Daily Sentiment Index (trade-futures.com) at extremes and turning points:

Dollar chart from Stockcharts.com

Clusters of low-mid single digit readings are very rare and very bullish. You all know what it means for stocks when the dollar makes a big break upwards.

For good measure, here’s the 3-year chart of the S&P versus the 20-day average equity put:call ratio:

Source: indexindicators.com

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Remember my mention the other day of a possible bullish breakout in grains? Corn, wheat and oats all had fantastic days. I was in wheat, for a 4% day. Here’s corn, with its 9% move:

Source: futures.tradingcharts.com

She’ll be comin’ round the corner when she comes…

Here’s a roundup of the usual markets, plus a look at grains. This topping process is frustrating, but the action remains encouraging for those waiting to profit from a resumption of the deflation trade. Even as some stock indexes make new highs, they have been revealing their weakness with low volume and advance/decline ratios. The currency and metals markets are signaling exhaustion, and Treasuries have refused to participate in this summer’s nonsense. To the charts:

The dollar to stock inverse relationship is still strong:

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With only a few % of traders (DSI) bullish on the dollar and about 90% bearish on stocks last week, and respective 20-day averages similarly extreme, a big reversal is imminent. We first entered this condition in early August, and we have not had a significant correction to relieve it, but it has grown even more extreme, so when the break comes it is likely to be very large. My theory is that the more extreme sentiment gets, the sharper the reversal, and the longer extremes are maintained, the larger the degree of that move.

From a trading perspective, I prefer dollar longs (via euro, pound, CAD and AUD shorts) and gold and silver shorts as optimal short-term plays right now. This is where the single-digit DSI readings and exhaustive spikes are to be found. Short entries from this level allow for tight and well-defined stops.

Risk appetite remains very robust across the board, with investment-grade corporate bonds back to the kinds of yields we saw near the peak of the credit bubble. Here is the LQD ETF:

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The above is sure to end very badly, since corporate revenues are off a whopping 25% since last year.  Treasury traders are holding up a big red flag and are not participating in this summer’s risk binge, but keeping a steady bid under the entire yield curve. Bonds made their bottom in June (TLT and IEF here — 30 and 10 year proxies, respectively).

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I almost never mention the agriculture markets, but I have been watching them all summer, and I think there may be an opportunity coming up for a short-term play on the long side of grains. Wheat, corn and oats have been in a downtrend for much of the last two years, and their slides may be approaching termination as DSI readings enter the 7-18% range. This is similar, though not yet as extreme as what occurred in the natural gas and hogs markets recently, and those went on to violently reverse to the upside. The grain charts are not yet as pretty as those, and sentiment has some room to allow for an exhaustive plunge, but if it happens that would be a very nice buying opportunity, especially if we get a few consecutive days of single-digit readings. Here’s a weekly chart of wheat, my favorite:

source: http://futures.tradingcharts.com/chart/ZW/W

Corn here:

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That about wraps it up. In summary, I’m feeling good about my long-term equity puts, but even more excited about the set-up in the currency and precious metals markets. I always like to able to go long something relatively uncorrelated, so it’s nice when a random commodities like grains provide such an opportunity.