The following editorial was published in Price Perceptions issue #1264 on April 17, 2004

Reminiscences of the Past

On Monday this week, the soybean market fell for further losses even though the USDA had just forecast the lowest ending stocks in 31 years. On Wednesday, crush was reported well below trade expectations and interpreted bearish by the trade – soybeans rallied for near limit gains. On Thursday, export sales were larger than expected and cash markets were exceptionally strong – soybeans fell for limit losses!

What’s happening? Why are grain markets ignoring positive news? Have the highs been made?

I had planned to buy a sharp break in corn and soybeans this week, expecting markets to recover into Friday. I was fortunate to buy both on Monday and Tuesday and enjoyed Wednesday’s sharp advance. However, my sense of well being was replaced by despair as both markets fell to new weekly lows on Thursday. The shift from confidence one day to uncertainty the next suddenly had a familiar feel... Was I reliving market experiences of the past?

Thinking back, my first experience with extreme emotional swings of this nature was in December 1972, just before Christmas. I had been very bullish on soybeans for months and the market finally traded above $4.00 for the first time in history. The higher the market traded, the more confident I became that soybeans would eventually trade at $7.00. However, in mid-December, a key reversal occurred and the market fell for a limit loss (limits were ten cents in those days). I wasn’t shaken because I had good profits in my position. I thought I could stand whatever the market threw at me. The next day, the market fell for limit losses, but came back to close only six cents lower. The next morning, I added to my position, confident the setback had run its course. However, the market ended the day limit down. I was surprised. Was I missing something in the market? The next day the market gapped lower and fell for limit losses again. Now, I was really in trouble. All I could think about was getting out! Why had I added to the position anyway? I was about to ruin Christmas for my wife and daughters. The next day, the market fell again and I bailed out of all but one contract. Now I had a loss for all my invested effort of the three previous months.

Of course, that was the low of the pullback. However, the market did not recover fully and attain new highs until more than a month later. Eventually, soybeans not only reached my objective of $7.00, but reached heights still not attained today of $12.90.

Lesson Learned: Don’t overtrade in major bull markets. By overtrading, I was forced to make a money decision rather than a rational decision. Also, overtrading caused me to lose confidence in my conviction the market would eventually trade to $7.00.

By the mid-Eighties I had learned a great deal of lessons about bull markets. I had been watching the sugar market in 1985 as it fell below three cents per pound. I believed all I could lose was three cents if it traded down to zero. I bought a contract of July ’86 sugar just below four cents and planned to hold it until the market turned up. Sugar traded sideways for nearly two months before it began advancing. It shot up to 5.82 before the first setback. I bought two more contracts on a halfway pullback and sure enough, the market turned up and advanced to 6.56. I added two more contracts on the next setback and once again prices advanced to new highs a month later. Wow, I had finally learned how to trade a bull market and not become too greedy. However, the market formed a top and I was stopped out near 5.80. I had made an awfully small profit for a six month effort. A few months later, July sugar made a high of 9.50.

Lesson Learned: Have strong conviction in where the market is going. Buying something cheap may work for the short term, but you must have conviction in where a market is headed if you intend to profit handsomely. Also, a technical top does not necessarily indicate the bull market has ended.

In 1995 our research indicated the corn market should trade as high as $4.00 in the coming season. Although prices had advanced into harvest, we began accumulating long positions. The market advanced nearly 60 cents from our original position into early January. We had added to the position on minor pullbacks. When the January stocks report was released, it confirmed the US would run out of corn by summer if demand was not curbed. My confidence level had never been higher in a major move. However, the market fell 26 cents immediately following the report. Although the break was painful, we did not lose one position because we had added conservatively. Two months later, new highs were made and we began adding to the position again. Following the March stocks report, the market moved into an accelerated phase and we took profits on a scale up to nearly $5.00.

Lesson Learned: Strong conviction helps hold positions together even through a major setback. Although positions were added, they were not so aggressive as to force a “money” decision. Maintaining confidence is the key to trading major bull markets.

Again this year, we have every reason to believe soybeans and corn should trade substantially higher. Yes, the market took me by surprise this week. But, I was reacting to volatility emotionally – not rationally. When I settled down Thursday afternoon, I realized major bull markets always have a way of shaking out “weak longs” before they begin another strong advance. After reminiscing about past markets, I have regained confidence and once again view the market from a longer term perspective... What happened this week will be forgotten in weeks ahead when corn and soybeans move to new high ground.

Bill Gary
CIS, Inc.


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