Futures Commentary and Analysis


The Most Glaring Conundrum
Jerry Welch - IF - Fri May 19, 7:21AM CDT

Jerry Welch, Commodity Insite! Call me at 406 -682 -5010 Ennis, Montana 59729

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Below is my newspaper column from a week ago, May 12, entitled, The Most Glaring Conundrum. When the dollar and the CRB Index began to move in near tandem I had a hunch that something significant was about to unfold with the entire Big Four: stocks, bonds, currencies and commodities. And I was right!


May 12, 2017

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The Most Glaring Conundrum

While stocks, shares, equities and the Dow Jones continue to make or flirt with new all time historic highs, commodities as measured by the CRB Index recently fell to a new, 1 year low. Another way of understanding what has been unfolding for some time is this; Money is flowing into the stock market but out the commodity markets. And over the past few weeks as that scenario has been garnering headlines, several analysts have weighed in on the phenomena in an attempt to explain the weakness with hard assets.

In an opinion piece from Market Watch entitled, “The commodity conundrum — why are prices so weak?

“Why is the CRB Index rolling over and the S&P GSCI Index flatlining the way it is? I can say with a high degree of certainty that the crash in the commodity markets that commenced in mid-2014 — a 50% decline in 18 months — was driven by the slowdown in the Chinese economy. This is because China is the No. 1 or No. 2 global consumer of most commodities in these indexes. If the Chinese economy is slowing, there is a clear multiplier effect where demand for such commodities will fall much faster than the magnitude of GDP slowdown.”

Statistically, where domestic and global commodities are concerned there are no shortages. In fact, if anything, supplies of most commodities are ample to burdensome. In the case of the U.S. ag-markets, grains and livestock, Barron’s also weighed in on price prospects and here are a few of their thoughts and forecasts.

“Among the commodities sectors, we are least optimistic about agriculture. Large crops in recent years have led to a substantial inventory overhang, and inventories will likely remain high given that total acres planted have been slow to drop. It’s worth noting, however, that while we believe agriculture commodities will remain depressed, farmers in North America are just beginning to plant the new year’s crop, and its size and quality could influence our outlook.”

The weakness with commodities per se and commented on by Market Watch or Barron’s is no surprise to me. I have stated for more than 6 months that the long side of all commodity markets should be avoided. I based that bearish outlook on the obvious. The obvious being the simple fact that the Fed is hiking rates with the promise of more hikes to come from now and into 2019. And since history shows that higher rates is bearish for all markets with the possible exception of the US dollar, being long any commodity did not make sense.

Here is where things get interesting. A few days ago, the US dollar that should be moving north based on the Fed hiking rates fell to a new, 6 month low. Thus, commodities as measured by the CRB Index fell to a 1 year low a few days before the dollar fell to a 6 month low. Down thru history, there is a near perfect inverse relationship between the dollar and the CRB. When one move up, the other moves down. But in recent days, they are close to moving in tandem and both heading south.

One reason for the dollar showing signs of weakness in face of bullish news ( Fed hiking rates) is because President Trump has been, “bad mouthing” the dollar saying it was, “too strong.” Should he continue speaking ill of the greenback it may move lower yet. Then again, how can or why should the dollar be weak when rates are have been increased with further hikes promised for the next few years?

In the case of the US commodity markets, grains and livestock it only takes one growing season, one bad crop to go from ample and burdensome supplies to a shortage and much higher prices. Thus, with the dollar starting to stumble any crop problems this year, real or imagined could spawn a host of bull markets. It is a rare scenario for grain and livestock prices to show weakness during the growing season when the dollar is also unusually weak.

The conundrum mentioned above by Market Watch is not, “why are prices so weak?” The real conundrum is this: Can commodities remain weak while at the same time the dollar is weak? In my view, that cannot happen for any length of time. Something has to give and soon. Either the dollar is headed north to justify the weakness with commodities. Or, commodities per se have to begin moving north to justify the weakness with the dollar.

The scenario of commodities and the dollar moving in tandem is a most glaring conundrum. And the most conspicuous conundrum in the entire Big Four: stocks, bonds, currencies and commodities.


On May 16, three short trading sessions ago as the dollar began to show signs of unusual weakness my work flashed a sell signal for the E-mini S&P. For my subscribers and brokerage accounts I specifically suggested selling the September S&P short and the fill was 2394.50. The market bounced on the close and I went home with a modest loss on the trade.

But the next day, the dollar fell to a 7 month low and stocks dropped sharply. I am still holding the short postion from 2394.50 with the last trade as I type furiously away being 2367.0 . I was lucky to have caught that break. Then again, I have been lucky all year with all my trading suggestions when it comes to stock futures. And below are the only trades I have offered this year. No others than those below.


**Bought (1) March E-Mini S&P 2342.00 Feb. 15, sold Feb. 15 2338.00

**Bought (1) March E-Mini Russell 2000 1350.00 March 21, sold March 12, 1359.50.

**Bought (1) June Russell 2000 E-Mini 1352.00 March 27, sold March 24, 1357.00.

**Bought (1) June Russell 2000 E-mini 1361.50 April 4, sold 1362.00 March 29.

** Bought (1) June E-mini S&P 2356.00 April 6, sold April 5, 2360.00.


Also note that the US dollar is 52 lower and close here or worse represents a new, 7 month low for the dollar.

The time is 7:20 a.m. Chicago

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