The following editorial was published in Price Perceptions issue #1253 on November 8, 2003

Bull Markets are Not Created Equal...

"A bull market is like a flower. If it is forced to bloom too soon, it will wither and die without reaching its full potential." - Roy W. Longstreet

Students of the marketplace have long observed that no two bull markets are alike. Some begin without warning, advance quickly, and end as suddenly as they began. Others advance in spurts and fits, constantly testing bullish conviction, then explode to heights never imagined. Why do markets respond differently to bullish news? Is there a way to understand and quantify different categories of bull markets?

Thursday morning, the USDA reported the largest weekly sales of soybeans in history. January soybeans opened 5 cents higher on the important news item, and fell 15 cents into the close. How could this happen? Doesn't the marketplace realize we will run out of soybeans if prices don't trade high enough to curb exports?

Roy Longstreet, one of the great commodity speculators, told me that markets only advance in one of two ways...

  • In anticipation of supply tightness

  • Or, in realization of supply tightness
Anticipatory bull markets advance before tightness ever occurs. In this type of advance, demand is rationed before the severity of shortage is known. Therefore, anticipatory markets never reach their full price potential because demand is rationed before actual supply tightness has a chance to occur.

Realizing bull markets advance as tightness unfolds. In this type of advance, demand is rationed as the severity of tightness increases. Because the true severity of shortage is unknown, the market advances in spurts and fits, testing whether or not demand has been curbed to the degree necessary. The latter stages of the advance are normally very sharp, fast, and exceed all price expectations.

There was a good reason soybeans fell sharply this week following the historic sales report - Prices had been near $8.00 for nearly a week. It has been six years since prices were this high during harvest and farmers took advantage and sold part of their crop. The temporary surge in farmer selling filled the pipelines and users backed off bids. However, prices are now 50 cents lower and farmers aren't selling. In a few days, the pipelines will empty and users will be forced to bid higher again.

This process is a classic example of how realizing bull markets work. Temporary advances encourage farm selling and setbacks continue to encourage usage. As long as the market does not advance too far, too fast, supply will continue to come to the market and usage will not be rationed. If this process continues, the 2003-04 soybean market will become another classic case of a realizing bull market. Later in the winter or spring, the market will begin to recognize that usage has not been curbed to the degree necessary. At that time, futures will suddenly begin a fast, sharp advance and move to price levels that exceed all expectations.

Bull markets are not created equal. If they are anticipated too early, the entire advance can be taken back. If they are realized too late, shortage can become severe and panic buying forces prices to unexpectedly high levels. The general rule is... the later the response, the greater the advance.

This year's developments in corn, wheat and soybeans exhibit classic characteristics of realizing bull markets. The latter stages of price acceleration has not yet begun. The current stage is the most difficult as markets test and retest your conviction. Those avoiding the pitfalls of overtrading and loss of confidence will be the successful survivors.

Bill Gary
CIS, Inc.


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