9, 2009 -- Bull markets have two major trends. One is the anticipatory phase. The other, the realizing phase. In the anticipatory phase, the bullish fundamentals are well known. Consequently, investors and traders rush to be buyers because they don't want to miss the boat. They anticipate what will be seen in the future and become buyers long before the fundamentals turn bullish. And that is the rub as prices rise sharply, getting ahead of themselves and forming a bubble. When it pops the market collapses.
Then there is the realizing phase. According to my old boss, Roy W. Longstreet in his classic book, “Viewpoints of a Commodity Trader,” published in 1969; “When one is faced with a realizing bull market, he has an unusual opportunity. The direction is highly probable and the degree is often large. Sometimes the rise occurs in a relatively short period of time. The risk is usually small.”
Mr. Longstreet, writes, “the characteristics of such a trade are: 1. A fundamentally bullish situation. 2. A reluctance by the speculators to buy. 3. An inversion or small carrying charge between cash and futures. 4. Bullish interests may be either cautious or bullish.”
On December 5, in this column I stated there was little left to the downside for the US ag markets other than, “crumbs.” Since then prices rallied sharply. In fact, December ‘08, was the most bullish December for the ag markets in history as measured by the CRB Index.
However, the 2nd half of ‘08 was the most bearish period for the commodity markets since modern records were first kept. The Reuters-Jefferies CRB index, which began life in 1956, declined just under 40 per cent in 2008, a record annual decline. The S&P GSCI index, the most widely followed benchmark for commodity investors was down 50 percent. Many argue that the record setting rally in December ‘08, was due to the prices being oversold and ripe for a recovery. The rally they say, was not necessarily indicative of what the New Year has to offer.
But I argue the first half of 2008, when the US ag markets posted new all time highs was the “anticipatory” phase of the current bull market while the second half of ‘08 was the bubble bursting. Leaning on Mr. Longstreet's expertise, I believe the ag markets are, 1. Fundamentally bullish. 2. Speculators are reluctant to be buyers. 3. There are inversions or small carrying charges across the spectrum of the futures markets. And, 4. Bullish interests are either outright bullish or at the very least, cautiously bullish. Today's ag markets are a perfect example of what Mr. Longstreet was referring to when he was describing the characteristics of a, “realizing bull market.”
According to MSN Money, Jim Jubak is the most widely read market analyst on the internet. I am huge fan of Mr. Jubak as I find his market views are far more right than wrong. In late December in a piece entitled, “10 Key Trends for Investors in 2009” he wrote; “Food. Yes, food commodity stocks collapsed in 2008. And, yes, prices for food commodities went into a retreat that turned into a rout; the prices of major grains are down 50 percent from their 2008 peaks. But don't count on food getting cheaper still in 2009. All the signs point the other way. The United Nations' Food and Agriculture Organization has warned that because of the global credit crunch, many farmers lack capital to buy seed and fertilizer for the 2009-10 growing season. That's likely to show up in commodity prices, via the futures market, by mid-2009. You can start building positions in these trends in the first half of 2009.”
Knowledge of the fundamentals of a bull market does not necessarily mean you will be successful in trading it. Mr. Longstreet, known respectfully as, The Chief, also wrote in his book; “To trade successfully, one needs two things; Knowledge and Courage. The knowledge you can learn or buy.
Courage cannot be learned or bought. You either have it or you don't. But you can't succeed without it.”
In past columns I expressed clearly my bullish bias towards the, “anything that grows” markets for 2009. How those markets perform in the first half of this year remains to be seen. But by mid year, a lasting bullish trend should be firmly locked into place that will carry into 2010 and beyond.
Between now and mid ‘09, do as Jim Jubak suggests and “start building positions in these trends.” Mr. Jubak is now as bullish towards the, “anything that grows” markets as I have been. And I am very bullish!
(The information in this article is the opinion of Commodity insite.com's Jerry Welch and subject to change without notice.)