Grains have traded sideways to slightly down in the last few weeks, with wheat being the most stable and making occasional daily-scale compressions. This behaviour is entirely consistent with the possibility of a bubble in the making, although it will take an upward break of these latest compressions to confirm that the next stage has begun. Bubbles only ever happen when a ‘normal’ bull market already exists because of some excess of demand over supply. The bubble can then develop for a variety of reasons – an attempted ‘corner’ as happened in Silver in 1979 or Cocoa more recently; hoarding of inventory as seen in sugar and other food crops many times or perhaps a change in world consumption patterns as seen lately in the shift of taste in China toward more meat.
In any of these cases, the first move up in price can be said to be ‘rational’ and is usually followed by a period of sideways price action on a ‘plateau’ where professional participants establish short hedges because the price seems ‘high enough’. We are probably on the plateau now. The next period is one in which prices break up from that high-priced range and soar quickly to much higher levels, fuelled by short-covering and panicky new buying. Speculators often join in and the press start to write about a ‘new paradigm’. This doesn’t last long - a few months at most - and the eventual peak is reached without many price dips along the way. The time spent at the highs is usually brief and a substantial fall then starts. Bubbles always fall all the way back to where they started, so ‘bargain hunters’ who try buying on the way down end up losing, as do almost all the speculators who bought on the way up. Rallies are few and small during this prolonged fall.
It can never be predicted whether or not a bubble will form after a ‘normal’ bull market has taken prices to the first plateau but there are some clues – excessive monetary stimulus being the most reliable. This is happening now in almost all parts of the globe and so conditions remain promising for this ‘bubble in the making’ to start inflating. We are watch closely and will comment as signals arise. Some charts:
The first 'stage' ended with some weekly-scale top extensions in soya beans and soya meal. Those extensions are now ten weeks old and so still within their 'shelf life of four months or so. This is a median figure however and trends can re-assert before that time expires:
We remarked that Soya oil was likely to be the least strong of all the grain markets when this subject first came up in late July and this has proved to be the case - there have been some profits to be had by selling short here, on rallies. There are two reasons to change this advice now, which are that the price has returned to a weekly-scale compression, as shown here, which should provide support. There has also been a monthly-scale compression, which indicates a great deal of pent-up pressure in this market and so you should regard it as being just as dangerous to ‘short’ as all the others from now on. The compression has yet to break of course, so we are watching this and other clues. If the prospective bubble never happens, an early sign will be a downward break of monthly or weekly-scale compressions.
There have been some other monthly-scale compressions in other markets and we will write later this week about the longer-term outlook for various asset classes. In the meantime, the daily-scale signals that we reported on the 17th September in stocks, some $-related exchange rates and in copper are all still 'in date' but approaching maturity. It is time to place slightly closer stops.