Markets are increasingly becoming correlated as focus narrows on coronavirus, be sure to monitor your portfolio correlation to avoid unintended risk
Chart of the day: Our agriculture market matrix bubble chart below, which plots trend versus momentum, does a excellent job visually describing the current market condition of the main commodity contracts we monitor, in addition it can highlight when markets become more correlated. It is not unusual to see sector commodities moving in roughly tandem, but if we were to add just about any other futures contracts outside of metals and fixed income, we would see a similar picture of values in the lower left quartile (gold, silver and bonds negatively correlated in the upper right). In other words, commodity correlations (positive and negative) are increasing and while it may be a benefit to traders in the short-run, it can be disastrous if it persists. Perhaps the biggest benefit to commodity trading and commodities in a portfolio, is the diversification one can achieve using contracts that are generally un-correlated. When correlations run high due to an overriding theme, as is the current case of the coronavirus, trader positions become highly correlated to one another. Commodities that generally add to diversification can quickly compound a diversification problem. The point of today?s chart of the day is be careful of your positions in times like this and monitor how correlated your portfolio has become. You may be running at risk levels higher than your original intentions and when the market focus moves, you see a a lot of traders trying to exit what has become an increasingly small door.
Agriculture futures market matrix
Corn: Corn values plunged Thursday as virus fears continue to worsen, dropping below our long term support and new contract lows. Prices are again under pressure this morning across most agricultural commodities with the theme likely being traders are not going to risk any long positions over the weekend. Resistance in the market will now be seen at the previous support at roughly $3.66 in the Mar-20 contract and $3.75 in the May-20 future. Our model has trigger new buy signals in corn for the first time since November and we see no reason not to use these signals as a good place for commercial accounts to book some coverage through July.
Soybeans: Soybean futures failed to hold the new lows on Thursday below $8.80 (K) and staged a very impressive afternoon rally closing up on the session. Overnight however, we have given all that progress right back and are again hovering just above the the $8.80 level. We should see some minor support today near $8.75, but more significant support sits at the contract low of $8.54 (K). Soybeans have not technically moved into oversold condition as measured by average oscillator values, but a new low close today would push values very close. No reason to even think about getting back long soybeans until we see a break of some material resistance and I would say that needs to be above $9.10 right now.
Wheat: Wheat prices closed at the lowest levels since roughly mid-December and are now threatening a reversal of our long-term trend model. We should see decent support for wheat near $5.20 (K) today but our reversal point and more material support sits at $5.06. Our short-term model officially went bearish back on Feb. 3, but has also been whipsawed by the rally that occurred on the 18th. Back into bearish condition now, the market has triggered oversold conditions, although nowhere near contract lows like we are seeing in both corn and soybeans. While wheat has the most ?downside room? it also has been one of the technically stronger commodities prior to the virus outbreak. We will stay on the sidelines for now, but wheat will be one contract we want to be aggressively buying when this trend turns.
Live cattle: Day three of our working buy order in Apr-20 live cattle and we now move our entry stop down to Thursdays high of $112.73. Prices yesterday bounced exactly off our long-term bear target and support level which was somewhat encouraging that maybe the sell-off has reached an end point, but given the weekend and generally bearish overnight tone, we are probably going to a break below that support sometime today. No reason not to stay patient and wait for market strength before entering any positions. The only reason we might want to get more aggressive would be if speculative accounts are not adding to shorts at such low values.
Lean hogs: Hog prices broke down again on Thursday, but have yet to threaten major long-term support at 61.00. This is likely however, only a matter of time given what we are seeing across most agriculture commodities with strong ties to exports. As I have mentioned previously, I think 61 is likely to be broken, but how much down-side is available below that level is likely limited. This is certainly a market I have no interest being involved in right now and would much prefer being on the sidelines for the weekend.
Cotton: Cotton values tumbled on Thursday as whatever remaining longs out there threw in the towel once prices moved below our support and short-term bear target just below 65. This has officially turned our long-term trend model bearish and the next target level for cotton sits at just above 61. As of the close on Thursday, cotton has now retraced approximately 75 percent of the rally we saw between mid-August and mid-January from roughly 59 to 73 or 23.7 percent. The large range expansion bar seen yesterday does suggest the worst of the selling pressure may be over, but closing at the bottom of the range diminishes that greatly. 61 should contain the balance of the downside, but I would not be surprised if we don?t test that area first.
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