The following editorial was published in Price Perceptions issue #1055 on August 5, 1995

Re-living a Bad Dream…

The following editorial was published June 18, 1993 to explain some of the emotions and frustrations involved when trading for a big move. Because of this week’s disappointing grain market performance, we thought it might be helpful to look back objectively at similar periods of uncertainty.

The ’93 bean market...

My confidence and pocketbook were shattered last week when soybeans plunged twenty-one cents in one day. How could this happen when futures had just tested contract highs the previous week? Did we miss something in our analysis? Is something happening in the economy to revive deflationary fears?

As I sat back to mull things over, it suddenly became apparent that I had lived through this exact situation before. Was this just recollection of a bad dream, or had I made the same mistake before? I picked up my book of charts and began to scan previous years for a similar nosedive in soybeans during June. Sure enough, there it was - a year I had gone through the same agony - the same uncertainty... 1983!

The ’83 bean market...

I had built a base position in November futures early this year. The market moved steadily higher and reached nearly $7 in April. By that time I had added to my position and was feeling pretty confident. However, the market began to trail off and I reduced my position as I had promised my wife I would do. (She never understood the advantages of pyramiding.) However, the market continued to erode and soon my profits were gone and the margin clerk had turned downright nasty. In late June, the market took one last dive and cracked February’s low. That was it! I bailed out and promised my wife I’d never trade beans again.

How could this be happening? It had been cold and wet all spring and farmers were well behind normal planting in both corn and soybeans. Yes, some acreage would be switched to beans, but even a million extra acres wouldn’t produce a crop large enough to meet the current level of demand. Maybe the economy had something to do with it - we were just coming out of the worst economic downturn I had ever experienced.

I reluctantly conceded to the technicians. After all, the market had made a top. Most market letters were also bearish and they all said the same thing - rain makes grain! Maybe I should go short and try to get my money back.

The next day planted acreage was reported. Wow, was it ever a shocker! Farmers didn’t switch corn to beans - somehow they managed to plant the corn after all. In fact, beans were the crop that didn’t get planted - acreage fell below the March intentions report.

I closed my eyes and bought two contracts at the market the next day - they were filled limit up. I wanted to buy more on a good pullback, but the market never set back enough to buy and feel comfortable. In three weeks the market was testing old highs near $7.00. It had turned hot and dry, but subsoil moisture was excellent from excessive spring rainfall. Just how bad could the crop be?

I took profits on the two contracts and felt good, having recouped a large part of my earlier loss. Two days later, November futures gapped higher and never looked back. The market moved almost vertically until it reached $9.67 in August. I had managed to take sixty cents out of a $3.30 move.

I have revealed this story because market attitudes were very similar to this year (1983 vs. 1993). Fundamentals were obviously bullish; but the market didn’t seem to care. I nearly forgot the important lessons I learned in 1983:

  • Don’t overtrade, a small position will make a lot of money in a big move.

  • Don’t lose sight of long term fundamentals, they always win out in the end.

  • Don’t be too quick to take profits in a strong market.

  • Maintain confidence in your convictions.

I was about to re-live a bad dream. However, past mistakes can become the key to success the next time around.

Since the early Eighties, markets tend to assume that supply will always be adequate to meet demand. Professional traders and grain producers have become accustomed to selling rallies based on weather or temporary demand surges as the marketplace appears unable to sustain bullish trends. However, this assumption has been challenged by recent trends in copper, cotton, and coffee. In fact, those selling wheat prior to harvest this year can attest to changing times in the commodity arena - Don’t loose confidence in the Grain Drain of 1995-96!

Bill Gary
CIS, Inc.


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