Futures Commentary and Analysis

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Signals That Cannot Be Trusted
Jerry Welch - IF - Wed Jan 11, 8:58AM CST

“The data and opinions in this report are for general information use only and are not
intended as an offer or solicitation with respect to the purchase or sale of any futures
contracts. Although all information and opinions are believed to be reliable, we cannot
guarantee its accuracy or completeness. The open trade and previous recommendations
were suggested, but that does not necessarily mean any individual followed the trades
exactly as recommended. This newsletter has been prepared without regard to the specific
investment objectives, financial situation and needs of any particular recipient. Past performance
is not necessarily indicative of future results. There is a significant risk of loss associated with
trading futures and options. “It should be noted that the impact on market prices due to seasonal
or market cycles and current news events may be reflected in current prices.”

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

Follow me on twitter@commodityinsite

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Below is my newspaper column from January 6. Hope there is something in my ramblings you find of interest.

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January 6, 2017

Signals That Cannot Be Trusted


A year ago I predicted 2016 would be the, “Year of the Dollar” and it was. The ‘ol greenback posted a, 14 year high of 103.59 with only a few days left in the year and if the Fed follows thru with its pledge to hike rate another 3 to 4 times in 2017, the dollar should ratchet higher yet. My upside target is eventually 120 before the rally has finally run its course sometime in the future. My forecast for the dollar was PDG…pretty damn good!


However, based on hindsight, 2016 was actually highlighted not by a strong dollar but by the head fakes and false signals that unfolded across a wide spectrum of markets. Few times in history, if ever, have so many different markets gone from feast to famine and back again in a year. Few times in history have so many different markets morphed from depressingly bearish to euphoric and back again in a year. The big story of 2016 was the head fakes and false signals that dictated investing and trading decisions and strategy.


Here are a few of the markets in 2016 that suddenly reversed only to become a mirror image of previous months. In each case, either the bulls or bears were ultimately caught leaning the wrong way and paid dearly for it.


Dow Jones. The first month of 2016 was the most bearish start to a New Year in history for the Dow. The weakness was so pronounced that most wrote the year off because, “as January goes, so goes the rest of the year”. But the Dow caught a stiff bid 11 months later on the night of the Presidential election when it hit a six month low and then headed north. By years end, the Dow posted a 13% gain, the best performance since 2013 and a new, all time high. The opening month of the year was a head fake as was the weakness seen on election night.


Gold. In the first 7 months of 2016, gold prices rose $300 an ounce with the market off to its best start since 1980. Investors and traders were euphoric and loading up on the yellow metal at a record pace. But the rally was a head fake with prices peaking in July and election night and by December were $250 an ounce off the high. Gold prices posted two head fakes during the year and both were bearish.


Cattle futures. In the opening days of 2016, December cattle futures were at $125 level but 8 months later had collapsed to $96 with most analysts expecting even lower prices. But the market suddenly turned north and on the final trading day of the year, futures nearly hit $124. It took 8 months for cattle futures and cash to drop $29 but only 3 months to rally $27. The collapse in prices was a false signal but now, questions raised about the rally.


The cattle market has become the single most volatility ag-market on the board and 2016 proved that without question. Cattle futures moved for a total price swing in 2016, of $56. I doubt in all history there has ever been such a volatile year except when mad cow disease was a market moving force. The highlight of the cattle market in 2016 was the bearish then, bullish head fakes given to cattle producers and traders. Roller coaster trading!


Hog futures. In early 2016, February lean hog futures moved from $64 to $70 before rolling over and falling to a 13 year low of $47 in October for a decline of $23. But the market suddenly turned north off the October low and nearly hit $67 in the final week of the year for a rise of $20. It took hog futures 10 months to fall $23 but only 2 months to rally $20. Similar to cattle futures, the highlight of the oinker market in 2016 was the two head fakes dumped on producers and traders. And the late year rally is questioned loudly by yours truly.


Natural gas. The market was on the decline from early 2014 when prices kissed 6.493 and did not appear to carve out a low until December, 2015 at 2.651. Hopes were high at that point the market would find the footing to head north and for a few months it did just that as prices hit 2.991 in January. But in a flash, the market rolled over into late February as a new, 16 year, yes year, low was posted at 2.494.
And from the February, 2016 low when the market appeared dead and I do mean dead, prices took off to the upside. In the final few trading sessions of the year, natural gas prices rose to 3.903, the best the market had been since early 2014.

By any measure, natural gas prices flashed three head fakes, or false signals in 2016. Year over year, natural gas prices did well but it was white knuckle ride and not for the faint of heart.


There were far more markets in 2016 emitting head fakes than the ones mentioned above. Soybeans, coffee, orange juice, all-the world’s major currencies, along with crude oil, wheat and Treasury bonds performed in a similar manner, flashing false signals catching both the bulls and bears leaning the wrong way. In 2017, expect more of the same where rallies and breaks cannot be trusted. They cannot be trusted as the marketplace has become exceptionally volatile and paranoid regarding Fed monetary policy that is in a tightening mode for the first time in nearly a decade. Such a scenario always creates false signals and 2017 will be no different.

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Yesterday, cattle, feeders and to a lesser extent the oinker market posted sharply higher gains and buy signals in the process. But are the buy signals head fakes? Time will tell.

This morning, KC wheat is 12 cents lower and posting a modest sell signal. But with a major USDA grain report due tomorrow, is the sell signal a head fake? Time will tell.

The US dollar is doing quite well today with futures trading north of 102.53. Some argue that such unusual strength so early in the day is a buy signal. They could be right but is the buy signal a head fake? Time will tell.

Cutout values for beef and pork yesterday were dismal to say the least. But is the weakness with meat demand a head fake? Time will tell.

And speaking of time it is now 8:56 a.m. Chicago



“The data and opinions in this report are for general information use only and are not
intended as an offer or solicitation with respect to the purchase or sale of any futures
contracts. Although all information and opinions are believed to be reliable, we cannot
guarantee its accuracy or completeness. The open trade and previous recommendations
were suggested, but that does not necessarily mean any individual followed the trades
exactly as recommended. This newsletter has been prepared without regard to the specific
investment objectives, financial situation and needs of any particular recipient. Past performance
is not necessarily indicative of future results. There is a significant risk of loss associated with
trading futures and options. “It should be noted that the impact on market prices due to seasonal
or market cycles and current news events may be reflected in current prices.”


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