BAL Do T-Shirts Predict Oil and Gold?

Sometimes you run into these things.

They look sort of predictive. But… “Correlation is not Causation”… and you need many repeats of the “action” to gain any trust in it being anything other than accidental.

Yet…

Markets are driven by people. People have repeated and predictable behaviours (even if they are sometimes very irrational).

I go to buy some more T-Shirts and find the price doubled, well, I can always make the ones I have go a few months more, or just leave off the T-shirt. A Marketer deciding on “Mugs or T-Shirts” for a promotional SWAG can just click on the MUGS button. A Dress designer can decide that “Polyester” is the “in” fabric this season, and cotton is just “SOooo last month”… If I’m worried about the future, I might well skip buying a T-shirt and jeans and instead buy a silver round or some gold, at least until things break.

Oil not so much… I still drive to work and grocery stores. Gold is driven by long duration fears that can take years to change; and by central banks with quarterly meetings. Grains have a natural annual cycle. Base metals are driven by the decade long business cycle and annual production plans.

But Cotton? Demand can shift “on a T-Shirt”… (Even if supply is more seasonal).

Cotton plants also have a high sensitivity to temperature. I’ve tried for several years to grow some in my cool climate location. In the very early 2000′s at the top of the hot side of the PDO I got a small batch to maturity. (It is a very slow long growing cycle, 120 day or so to maturity, crop that needs lots of heat). So you would expect marginal cotton areas to have crop failure early in the swap to a cold phase of the planet. (And then producers would shift to warmer areas… perhaps those that had too little rain before, but are once again “blessed” with a lot of it…)

Put these two together, you have a commodity that can have demand destruction literally overnight, and supply collapse early in a cooling phase. So you could have rapid “bubbles” on supply constraints, then rapid collapse on demand destruction. But will the pattern be usable in the future? Or is this a “one off” as farmers adjust?

Only time will tell. But for now, BAL – the Cotton ETF, bears watching as a potential Agriculture Canary and perhaps even a leading indicator of other commodities as well.

Look closely at this chart. Cotton (BAL) had a “failure to advance” at the start of April. Well ahead of the other commodities. The crop was known to be limited. Buyers had already committed to fabrics and quantities. There was a global bidding war for bales. Then, the turn. Prices are being reflected at the checkout counter. New designs for a new season are “in the works”. Farmers are adjusting.

So scan down that list of commodity ETFs and look at when each “turned”. Do we have lag time between early and late, leading and lagging markets? Can this be used “going forward”?
I hope so… “But Hope is not a strategy. -E.M.Smith”…
Yet it does point the way toward one.

BAL Cotton  vs Commodities Basket June 2011

BAL Cotton vs Commodities Basket June 2011

At the end of March, we had the first indication. The “about every month” peak was lower. “Lower Highs”. That is often the first indication of a “topping action” in a market. We enter a “battle ground market” for a while as the lows are still being bid up, but the tops are not. I often call that “wedging in”.

Then, in early April, we have the hard downward call. Lower lows as a price breakout to the downside happens. Price goes through that 48 day SMA line. (Most traders use 50 day, I set mine a bit shorter as I’m often not checking every day and want a bit faster “twitch” in exchange for a bit more risk of a ‘whipsaw’ trade.)

At the same time, RSI stops being an 80/50 oscillator and moves through the midline. The “run” is breaking down. MACD had been in a “be out” configuration (red on top, “mouth down”) since early March (about the time RSI started that series of ‘lower highs’). In mid April, MACD goes below the zero line into “bear market” territory. Even that slow indicator of DMI had the ADX line (while wobbling sideways as it does in a major bull run) starting to drift down and with the Blue DMI+ line crossing over it to the downside. In mid-April we get the Red On Top crossover into a Bear Market condition. (Not just a ‘correction’ in a Bull Market).

Now look at CORN (that holds Corn Futures contracts). It starts to break later. We’ve just barely had a ‘failure to advance’. Tin JJT didn’t have a breakdown / failure to advance until the start of May

JJN Nickel and JJC Copper look like they started to break down just a bit earlier (Copper is widely held to be a key economic metal and indicator of economic activity), and the popular gold and oil trades look like the last ones to “get the memo”. (Though oil has now broken and gold has had a ‘failure to advance’ and is stagnant). I’ve not put The Silver Bubble on this chart as it compresses the other tickers too much, but it’s timing is in with the rest with the “POP” about the 1st of May.

While JJN, Nickel, breaks harder and has an easier to read chart, this is the JJC ticker. A bit compressed by the Cotton Bubble, but still readable (and a good example of how the lower indicators can let you more easily see what’s happening in a very compressed price chart “race”).

The “clue” here, IMHO, is to watch JJC and JJN for an early read on economic activity, and thus, aggregate commodity demand; and watch BAL as a very sensitive indicator of weather impacts on other ag commodities (and also reflective of aggregate demand for “goods”). IMHO, those, together, ought to make a decent “commodities canary”… But “the proof is in the eating”, so only a bit of ‘trial’ will tell.

JJC Copper vs Commodities June 2011

JJC Copper vs Commodities June 2011

JJC  - Copper 
GLD  - Gold 
JJT  - Tin 
JJG  - Grains basket (mixed) 
BAL  - Cotton 
CORN - Corn Futures basket
USO  - U.S. Oil (as opposed to Brent)
JJN  - Nickel 
DBP  - Precious Metals basket
DBB  - Base Metals basket

Here is a “live chart” for use going forward:

JJC Copper vs Commodities Basket

JJC Copper vs Commodities Basket

At some point the economy will start to turn up again, and with it, demand for commodities. The normal annual cycle has the commodities trade happening “soon” (in the next month or so), but this isn’t a normal year. Still, worth watching the chart for a timing signal.

Watch for ADX inflecting up, DMI- (red line) inflecting down. MACD crossing zero to the topside. RSI with “Near 20 then ‘higher low’ about 35″. That would say Copper demand has picked up, and other commodities will follow suit.

Watch the following Ag Canary chart for the ag cycle plays to move too. I do note that SGG looks to be “out of phase” with the others. Brazil dominates sugar, so there may be a hemispheric seasonal issue here, or sugar may be an even earlier indication of change of trend. (I lean toward seasonal cycling, yet JO and NIB are not cycling with it).

BAL Cotton vs Ag Commodities Basket

BAL Cotton vs Ag Commodities Basket

BAL  - Cotton
WOOD - Timber / Wood
COW  - Mix of beef, chicken, and pork
JJG  - Grains basket
DBA  - "Agriculture" basket
CORN - Corn futures contracts
USO  - U.S. Oil (key input cost)
SGG  - Sugar
NIB  - Cocoa - Africa and S. America dominated
JO   - Coffee -Africa and S. America dominated

For each commodity there will be individual drivers. Freezes, floods, mine collapses, Sovereign Risk, wars and new uses / replacements. The goal here is to find a broad trend that may be used to draw attention to a trade potential; for further investigation before a trade is “put on”; not to give a hard rule for making trades. We’re looking for the Canary In The Coal Mine, not a gas mask… so don’t depend on this too much, OK?

But if, for example, we find a seasonal offset of SGG, NIB, JO with SGG being the leader vs BAL, CORN, JJG with BAL being the leader, then we have a nice little set of recurrent trades that can be done throughout the year… So watch them. Think about them. See if the thesis “has legs”, or if we just had a “one and done” market glitch as cotton rose on Egyptian unrest and China paused in their copper buying… If it’s not “repeatable” (even with some stochastic jitter) it’s not all that useful.

But “Time will tell”…

Right now, all the buzz is about the amount of corn land that is flooded and what that means for corn supplies. To me, it looks like the price is already bid up on the futures and the risk is to the downside as folks in other states plant more corn and less sorghum / soybeans. So I’d watch CORN for a “roll down” as confirming that thesis, or a ‘breakout’ to repudiate it. As of now, it looks like “failure to advance” to me.

The “hot one” to me is that SGG run. I have no idea WHY it’s running (something to “dig here!” about). But clearly it is…

In Conclusion

This is an example of how you look for an ‘edge’. Something that may give you a better point of view on moves in any given market. Some other product or market that may regularly move ahead of the thing you wish to trade.

It is also an example of how you can use a chart to “moderate” your “story” and “emotional trade” desires. Maybe there is a “story” that Corn is just going to be enfuego due to the floods. You can look at a chart and see “I think I’m too late to the party”. Or you have an emotional desire to “buy gold ’cause it’s going up”, but you can see from the chart it has gone flat. Charts help “proof” the story and help “contain” the emotions.

Charts also help a great deal with timing. It’s great to have an “inflation story”, but if the trade is already done and prices high, your timing is “too late”. Don’t make the trade. Or perhaps you have a desire to “buy Tin cheap” now that it’s off the highs. But is it as cheap as it will go Right Now? The chart will tell you when that downward momentum has ended. When the downside “risk” is moderated and the upside movement has begun.

Is it helpful to look into the “story”? Sure. It can provide the depth to decide things like “how long is the trade likely to run?” or “Is this just a short cover Dead Cat Bounce?”.

So, for example, looking into WHY is SGG moving we find:

http://www.commodityonline.com/futures-trading/technical-reports/Sugar-regains-on-export-concerns-24445.html

Last Updated : June 27, 2011 12:00

Sugar regains on export concerns

Spot prices of Sugar and Futures settled 2.47% and 5.86% higher respectively w-w on account of approval of additional exports of 5 lakh tonnes. Government allowed export of five lakh tonnes more under the open general licence (OGL). The decision was taken at a meeting by the Empowered Group of Ministers (EGoM) on Thursday, 23rd June 2011.

LIFFE sugar futures ended 0.18% higher owing to concerns over congestion at the Brazil’s and Thailand ports are providing support to the prices. ICE Raw sugar futures however ended lower on account of reports of owing to reports of better global production of sugar according to the report by F.O Licht and positive decision on exports by the Indian government of additional 5 lakh tonnes.

Prices have surged more than 30% from the lows touched in early May as fears of lower-than-expected output from top producer Brazil next season have outweighed expectations for a large world surplus in the 2011-12 crop year, pegged as high as 10 metric tons of raw value.

So some of it is a “speed of loading ships” issue. Short term timing. But some is a seasonal production expectation. That can run longer, but watch for “failure to advance”…

Sugar prices are expected to recover further on predictions of below normal monsoon in Central India and allowance of sugar exports from India. In the medium term prices would depend on the planting progress of Sugarcane across country and thereby the output prediction for 2011- 12 Prices are expected to trade in the range of Rs. 2450-2650 per qtl levels.

From long term perspective, prices are expected to take cues from the supplies from Brazil and demand from China as the country is expected to increase its sugar imports in the second half of the year.

Indian rainfall is an issue, but perhaps a focus on weather in Brazil matters more long term. Beyond that, you are looking at a sweet tooth in China.

So you would need to evaluate that kind of “stuff” to know the “legs” this trade might have. For now, I’d trade it off the chart and watch for “failure to advance”. And I’d likely check out the weather in Brazil…

BUT, if I’ve not even looked at the chart, I’d have had no clue to go take a look. Just as the “hype” about cotton on the TV came just as we approached the top of the Cotton Bubble. Expect to hear about suggar in “the news” just about the time to end the trade.

For now, I’m watching JJC as a potential “bottom fish” and general market indicator, and I’m watching BAL and DBA as general Ag commodities Canaries… and not getting into the Corn trade just yet. If Corn starts to ‘come off’, watch that COW line as feed costs drop… Meat prices are being depressed by an overhang of frozen meat right now, but at some point that will clear and feed costs will drop. Wait for it… wait for it…

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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