Performance of 40 Futures Markets after Q1

Commodities continue to grab headlines this year, as stocks have took a tumble in April, forcing many to question whether 2014 is the year of “Commodity Sex Appeal?” We’re a little bit past the first quarter of the year, and there’s reason to believe in the appeal by the amount of green shimmering below.

Futures Market Performance(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy:

Here’s some of our thoughts:

  • 31 out of 40 Futures markets are positive thus far this year. That’s an impressive 75 percent, compared to a 50/50 split from all of last year.
  • Softs & Ag markets are by in far outperforming other markets, holding the top 11 positions, while last year’s high performers, futures stock indices are in the red, or close to it.
  • The so called “Dr. Copper” which many believe to be a predictor of turning points in economics, is the only metal down on the year.
  • Not that it’s a shock by now, but Coffee remains to hold an unbelievable up trend, now standing at 78% YTD. Here’s Coffee by the numbers.
  • The nasty hog virus sweeping the nation is causing a lack of supply, having a rippling effect on the Lean Hogs market.
  • Natural Gas has all but erased its multiple instances of volatility explosion, while the Crude Oil Market is getting boring.
  • As the situation in Ukraine continues, the Corn and Wheat markets could be impacted.

What’s in store for the rest of the year? Are Coffee and Lean Hogs done with their uptrend? Will the Ag Markets be one of the top performers list for the full year? Are stocks going through a “correction” phase, or is the bull cycle over?

From a managed futures perspective, CTAs don’t care about the headlines, the hype; they don’t even care if Commodities themselves are up or down. All they care about is a consistent prolonged trend in either direction. Although we will say the nice thing about up trends is there is no cap on how high they can go (in theory). In comparison short trades have a natural floor (cost of production) and can never go below zero.

From a more broad perspective, after last weeks fall in stocks, we can only guess that there were more than a couple investors searching “Alternate Investment Opportunities.” So is it time to Google Alternative Investments, or is this just a blip before the stock market run continues? For those of you who think stocks will have another repeat year, ignore the last part. For those of you who might consider protecting your portfolio, do your due diligence about what alternative investments are out there, and what their return drivers are before taking your next step.


Floating Gold (Whale Poop) worth more than Commodity Gold?

The age old question of “Where do you think Gold is going,” is often heard among the blogosphere, financial media, and others such as Jeff Gundlach of Doubleline who will always make predictions on. Right now, the gold market is up a somewhat impressive 7% YTD when compared with last year – but certainly nothing to obsess over, like the guy we happened to stumble upon in the U.K. who has come into some money, because he discovered Floating Gold, (which it turns out is the nickname for Whale Poop), via The Daily Mirror.

“Ken Wilman said his boxer dog Madge found the 6lb lump in Morecambe, Lancashire.

Ken only realized its potential value [he was paid 100,000 pounds for the find] after an online search revealed the substance was ambergris, an ingredient used in the manufacture of perfume.”

Floating Gold

For those who are not aware – ambergris - the fancier name for ‘whale poop’, is extremely rare and is even used in some alcohols (that will definitely make you think twice before taking your next drink). Coming off a year where Gold Futures dropped 28%, should you abandon any investments you have in gold and hit the beaches of England searching for ambergris?  Well, let’s see how much that Whale Poop is really worth.

While there is not exchange rate for Whale Poop, the guy was handed 100,000  British Pounds (about $167,000 US Dollars) for 6 pounds of ambergris. That’s $27,833 per pound of the s^&% (literally), or $1,906 per Troy Ounce.  Wow!… That’s some expensive s^&%, and actually more expensive that Gold itself, which prices out currently at about $1,300 per Troy ounce.

Forget Bitcoin… the new hot currency might be ‘Floating Gold’!  And don’t get us started on the liquid gold known as nailpolish at over $1,000 per gallon.

Chart of the Week: The Incredibly Boring Crude Oil Market

Remember the good old days when Crude was at $150, Saudi Princes were having Audis made out of Silver, and trader’s were storing oil on tankers to turn a profit…. Everyone had an opinion on where Oil prices were headed, with crazies throwing out $1,000 Oil and others saying there’s $75 of risk premium built into the price. Those were the good old days when Crude Oil stories read like the tabloids…

But fast forward a few years and Crude Oil has become…dare we say… boring.  Just take a look at the incredible shrinking range of Crude over the past 3.5 years to see what we mean.

Crude Weekly(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy:

Crude had over a $100 point range in 2008, a $60 range in 2009, and about $40 in 2011. But since then it’s been smaller and smaller daily, weekly, and annual ranges for the poster child of commodities.  Just look at last year, where despite tensions tension’s in the Middle East last summer and a train holding thousands of gallons of oil derailing, the volatility in crude oil decreased by -18% {past performance is not necessarily indicative of future results}.

But here’s the thing, contracting volatility and decreasing ranges can be compared to a spring being coiled up (compressed), with only one way out – a fast, swift decompression. Is Crude Oil about to stop compressing and spring back into activity? Nobody knows for sure, but the chart is doing a little thing the technical analysis folks like to call a “pennant” chart pattern.

See how the triangle sort of looks like a baseball pennant (not that us Cubs fans in Chicago know much about what a pennant looks like outside of the one’s on the Wrigley scoreboard).

Cubs Pennant Flags

The “pennant” chart pattern is a triangle shaped pattern where prices continue to fit into the smaller and smaller range between the converging sides of the pennant, until…. they breakout to one side or the other. Now, those with more of a background in this sort of thing can debate where the flagpost is, whether this is a bull or bear pennant, and the rest. But for most trend followers, they don’t really care which way Crude Oil breaks from this pennant range – they just want it to break.  Some pennant formations can last days, and others can last multiple years (such as this one). But inevitably, as the range of the market continues to be constrained, a new breakout from that range will occur.

Here’s hoping…

Risk On/Risk Off Shutting Off

There’s no doubt Commodities are receiving more attention this year than years past, and it’s because of breakouts in Natural Gas, Coffee, Cattle, Lean Hogs, Sugar, Wheat, and Corn. Now some of the these trends have reversed course, not allowing long term trend followers to fully capitalize – but we’ve seen markets moving on their own fundamentals, not based solely on the Fed Minutes or view on the economy (what became known as the risk on/risk off environment back in 2009/2010).

There haven’t been too many Risk On/ Risk Off days to speak of in 2014, with just 1 ‘risk on’ day in both February and March. We define risk on as an average gain of over 1% for “risk” assets; risk off is an average loss of over -1% for “risk” assets. (Click here for a more detailed breakdown.)

Risk On Off(Disclaimer: Past performance is not necessarily indicative of future results)

This is no doubt another sign that the ‘recovery’ is in full force, with markets dancing to their own beat instead of following equities higher or lower on big moves. But it also could be a sign of further compression in volatility and a pending volatility spike – no chart goes/stays down like this forever.

Overall, Global Macro and Managed Futures strategies should be enjoying this move away from the risk on/risk off environment- as markets moving  in different directions/amounts at different times allows for the benefit of market/sector diversification such strategies rely on for risk control. Now if they could just stay in whatever direction their independently moving for a little bit longer – we could capture some nice trends.

7 Commodities in Contango and Backwardation

One of the more unique aspects of futures contracts compared to other investment styles, is that there are fixed term contracts which expire at specific dates, and many different ‘contract months’ for each commodity futures market. So, you can trade July 2014 Corn, or the December 2014 contract, or the July December 2016 contract, and so on – depending on how you are looking to approach the market and what term you are looking to hedge. A quick look at the CME’s website shows how there are different prices and trading volume in several various ‘months’:

Corn Futures Market(Disclaimer: Past performance is not necessarily indicative of future results)
Table Courtesy: CME Group

Charting these different prices for the different contract months gives you what they call the price “curve”, with a downward sloping curve defined as a market in ‘backwardation’, with the further out prices lower than the nearer month prices. And an upward sloping curve defined as that uniquely futures term: Contango.  We’ve pointed out how Commodity ETF’s typically underperform the commodities they track due to the markets they track being in Contango, forcing the ETF to have to pay the roll yield (get out of the cheaper one, into the more expensive one) several times per year, and thought it would be worthwhile to check in on several markets to see whether they are currently in backwardation or contango.

Here are the Contango/Backwardation curves of 7 Commodity Markets extending into 2015.

Markets showing Contango:

Coffee Contango(Disclaimer: Past performance is not necessarily indicative of future results)

Wheat Contango

Markets showing Backwardation:

Crude Backwardation(Disclaimer: Past performance is not necessarily indicative of future results)

10 Yr Note Backwardation(Disclaimer: Past performance is not necessarily indicative of future results)

Mixed Markets: 

Corn Mix(Disclaimer: Past performance is not necessarily indicative of future results)

Lean Hogs Mix(Disclaimer: Past performance is not necessarily indicative of future results)

Cocoa Mix_1
(Disclaimer: past performance is not necessarily indicative of future results)


1. Lean Hogs continues to push all time highs, due to a deadly diarrhea virus, killing millions of young hogs.

2. Will a negative roll yield shut down managed futures bond tailwind?

3. It Takes Two to Contango

4. M6 Capital believes South American countries will push the grain commodities lower.

5. Coffee is off its screaming trend


23 Commodity, Equity, and Currency Markets since the 2009 Low

Markets Since 09It seems like only yesterday we had 700 point down moves in the Dow, Lehman going bankrupt, and billions and billions in bailouts being handed out as the stock market made new lows seemingly every week, dragging down most commodity markets with it. But can you believe it’s actually been 5 years, with the low of the crisis happening 5 years ago yesterday – March 9, 2009. The first 3 years sure went by quickly… as we didn’t really know we were in the clear, and now the last two have been a blur of new highs in the stock market seemingly every week.  My how things change in a hurry.

Now, that was the low in the US stock market – other markets like Crude Oil bottomed before then, and some like Wheat bottom after that – but it’s hard to find many losers among the basket of markets we track since that fateful day 5 years ago. Everything on our list is up since then besides the US Dollar and Japanese Yen (imagine that, the two economies which went nuclear in terms of providing capital to the markets).

Some items of note include Copper outpacing Gold almost 2 to 1… (funny we don’t recall any stories about Copper vending machines over the past 5 year); Cotton surging over 140%, and Crude Oil the only other market not a stock index having more than doubled with gains of 124% (of course that would have been tough to realize with the cost of carry and negative roll yield.) (Source: All data in the chart to the left is cash data provided from CSI.)

Meanwhile, Bonds have managed to stay positive despite 5 years of predictions of rising rates and debt ceiling debates; while Natural Gas somehow managed to get into the black after spending most of the 5 year period worse than the March 9th, 2009 low.  And most impressive of all, of course, is US stocks, where the S&P has even become a bit of a third wheel despite more than doubling, because of the high flying Nasdaq and Russell 2000 which are both better by more than 225%. Wow – why didn’t Bernanke just come out and tell Americans to buy stocks, on margin, on March 9th – and guarantee against any losses…

The question is – which markets will be the top performers over the next  five years. Will we see a five year replay of the start of 2014, where last year’s laggards are this year’s stars (so far), or will history repeat itself in one of the greatest bull market continuations of all time (not sure we can count on that…unless Bernanke wants to come out of retirement and make that guarantee). To remind us just how things can change from one 5 year period to the next, we decided to use March 9th, 2009 as a marker and look at the 5 year returns of the main asset classes both leading up to that point, and since that point. You can see a tale of two five year periods, with the two Asset Class scoreboards almost an exact inversion of one another.

2004 2009 Asset Class2009 Present
(Disclaimer: Past performance is not necessarily indicative of future results)
Sources: Managed Futures = Newedge CTA Index,
Bonds = S&P/CitiGroup International Treasury Bond Ex-U.S. Index
Hedge Funds= Dow Jones Credit Suisse
Commodities = UBS Commodity Index (DJC,) Real Estate = iShares DJ Real Estate ETF (IYR);
World Stocks = MSCI ACWI ex US Index, US Stocks = SPDR S&P 500 ETF (SPY)

Chart of the Week: Hog Prices and the Deadly Diarrhea Swine Virus

Sometimes the headlines just write themselves… We might have been writing about hogs today given their sharp move higher and multiple “limit up” days in a row; but when we found out the move was from a deadly diarrhea swine virus… well, that’s just too good to pass up.

One might think the public would have heard about something as unique as this, but Kelsey Gee at the Wall Street Journal details that the virus started almost a year ago, and uncovers the scope of the situation.

“Porcine epidemic diarrhea virus has spread to farms in 25 states and killed millions of young pigs since it was identified in the U.S. for the first time last April, and the number of confirmed new cases each month has accelerated since late last year, according to industry estimates.

Last month, the U.S. Department of Agriculture trimmed its forecast for total U.S. pork production this year by 160 million pounds to 23.4 billion, citing the continued spread of the virus. Its forecast marked a 1% increase over 2013 output, down from a 2% increase projected in January. The government is scheduled to update its forecast on Monday.”

Well, it’s nice to hear this isn’t spreading to humans (a la Mad Cow or Bird Flu), but did he just say millions of hogs?  We happen to have someone in the office whose grandparents used to be pig farmers (among others) and know that it usually takes six months for young hogs to grow up. Theoretically, that means we should have started experiencing a shift in lean hogs in September, but we’re only now seeing a spike due to the lack of supply.

Lean Hogs(Disclaimer: Past performance is not necessarily indicative of future results.)
Chart Courtesy:
(If wondering why the chart is all jacked up, see here and here.)

Hogs have been up 15 out of the past 20 days, with a run of six straight up days in there and two “up limit” moves based on this diarrhea virus, catching more than a few traders on the wrong side of the Hog market:

“I’ve been around this market 28 years, and this is the most extreme situation of wild panic that I’ve ever seen,” said Dennis Smith, a commodities broker at Archer Financial Services in Chicago. Traders who had bet on lower prices “were just run over,” he said.”

These ‘limit up’ moves can be worrisome for Managed Futures managers and systematic programs who risk only a small percentage of total equity on any one trade (typically at or below 1.0% of equity), because the market won’t let them out during such moves, meaning their willingness to risk $10,000 on $1 million could mean a loss of $15,000 or $25,000 by the time they are able to get out of the position.

Just what is ‘up limit’ or as it’s also called – ‘Limit Up’?  Well, besides being on our Best (futures) investing movies ever list, Limit Up is a unique futures phenomenon where the exchange halts trading if a market moves too far up (or down… Limit Down) and there are no offers at that price.  In layman’s terms – when there are no more market participants willing to sell at a price 3% above yesterday’s close, the market shuts down until tomorrow, or until someone comes in and is willing to sell at or below that price.  This is similar to the circuit breakers employed on the NYSE, and is intended to give people time to catch their breath, reassess the situation, and allow for better price discovery.

The CME sets the lean hog price limit move at 0.03¢ above or below the previous day’s settlement price, which might not seem like a lot, until you consider it represents about a 3% move. Both Live Cattle and Feeder Cattle have the same 0.03¢ limit.

So what if a CTA was caught in on a short position, would there be a hell to pay? Let’s consider a $1 Million account risking 1% per trade and using the 6 day Avg True Range of $1,398 as a risk amount  – they would be doing 7 contracts (1%*$1mm = $10k/$1,398). Now, the two limit moves in Hogs saw prices go up (there may have been some offers in there, we’re assuming there were none for this example) from an opening of 103.85 to 112.575 three days later. At $400 per full point, on 7 contracts, our theoretical CTA would be looking at losses of about $25,000, or 2.5%.  And if we assume they were almost out of their position the day the market’s locked limit and this entire extra loss was on top of their desired 1% loss, that’s a 3.5% loss – not the end of the world, but about three times as much as they wanted to lose on the trade.

How common are these limit moves?  Not very, although Lean Hogs has already experienced more “up limit” move days in the past two months than in the past three years…  and it’s only one limit move away from tying the number of moves in 2008. The question is… will we see more to come if the virus isn’t controlled?

Up and Down Lean Hog Limit Moves(Disclaimer: Past performance is not necessarily indicative of future results)

P.S. – Both Feeder and Live Cattle are still hovering around their all time highs

And don’t forget our Bacon post:  ”What does Chinese deal mean for Hog Prices?