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:


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 or

Long live the dollar!

Dollar index here, with my annotations of readings in the Daily Sentiment Index ( at extremes and turning points:

Dollar chart from

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:



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:


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:


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:


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).


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:


Corn here:


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.

Grains are starting to look good again.

Almost all of the speculative froth has been blown off the agriculture sector in the past 6 months. The long-term picture for food still looks good, with the world population still growing like mad and Asia in a secular upswing (if cyclical trough). Grains are relatively cheap by historical standards (100 years, not 10!), and while much of this is due to technology, I suspect that this century’s productivity gains will pale in comparison to those of the 20th.

The DBA ETF is an easy way to play, with about equal parts corn, wheat, soy and sugar. I’m going to be scaling in on weakness:

Click for larger view. Source: Yahoo! Finance.

Agriculture is a perfectly good inflation/currency failure hedge, and it benefits from positive fundamentals, unlike many other such plays.

In a depression, grains have a leg up on metals, since even though not much will be built in the next few years, people still need to eat. Furthermore, as governments get more and more reckless with their market interference, they are likely to screw up supply by enacting tariffs, price controls, wars and other nonsense that causes shortages.

Likewise, oil at lower prices will be a great buy. New demand or not, supplies are tight and getting tighter. Peak oil is real — this also has implications for agricultural prices.

I’m no perma-bull here: I made a 10-bagger on DBA calls last fall-winter and got out before the top. This time I’m not trading, but buying to hold. As in gold, I will welcome lower prices in the next few months.

Deflation file: All commodities but gold are now bust.

This is a chart post. All materials prices are now way off their peaks, many having retraced the entire manic phase from 2005-2008. Shipping costs are down, too. This is what deflation (aka credit contraction) does.

Here first are the grains (charts from CBOT):

Metals now. All charts from Kitco.


Here is the Baltic Dry Index, a measure of the cost of shipping dry bulk materials (Bloomberg):


Given the strength of the declines in other commodities, I am now calling for $500 gold, not $600, and I am not ruling out $400. Everything else should continue to fall as well. To hedge against the big inflation/currency failure that will follow this deflation, you could buy any commodity or basket of them, but gold’s density and liquidity make things easy.

Gold is a form of money, so it is logical that in deflation it should rise relative to other commodities, even while falling relative to paper for a while. This is setting up as the perfect opportunity to exchange fiat money for the real thing, just before the fiat fails.