…The gold and soybeans rallies are about to find themselves out of gas… “What do gold and soybeans have to do with each other?” The short answer is that they are both the most speculatively overbought commodities we trade…
The comments above and below are excerpts from an article by Andy Waldock (blog.commodityandderivativeadv.com) which has been edited ([ ]) and abridged (…) to provide a faster and easier read.
…Bubble markets, parabolic markets and manias are all manifestations irrational herding behavior. We believe that human beings are generally rational as individuals. However, human beings in groups or crowds can be exceptionally irrational. This is the nature of a bubble and it happens in two ways.
- First, there are the cheerleaders and “fearleaders.” These are the ones we hear on TV telling us it’s going to pull a Buzz Lightyear “to infinity and beyond” or the Chicken Littles claiming that the sky is falling. Either way, their noise plants the seeds in speculative minds.
- The second step occurs within the speculator. Their mind starts working against them as they see the markets move higher without them. They question whether it’s too late to get in. Will it really go to a million? As this worm turns through their heads, they go through all the phases of internal conflict resolution. At this point, the only thing left to do is scratch the itch or buy the market which is inevitably the top.
There have been tons of investor psychology studies and they all follow approximately the same pattern. This is why we consider both the size and rate of growth within the large speculators category of the Commitments of Traders report to be such crucial variables. We balance this against the rational behavior of commercial traders who are the producers and consumers of the commodities in question. Their actions represent value plays in the commodities in which they deal. The farther a market moves beyond the commercial traders’ collective sense of value, the more attracted to the market they become as it relates directly to locking in greater profits for their business endeavors. As you can see, the rationale behind their collective actions is the exact opposite of the speculators through, “locking in futures profits” rather than “betting on a million.”
The more a market moves beyond its value envelope and is fueled by public mania, the more tension builds between the two primary trading groups. Finding and quantifying this tension is fundamental premise behind Commitments of Traders swing trading methodology. The greater the tension, the greater the possibility of a violent reversal as the bubble bursts. We’ve been following the growing positions in the gold and soybean markets and view both of them as prime examples of our application.
We’ve written extensively on the background behind both of these markets. Here is the gold setup and here is the soybean situation. Today’s piece [go here to read it in its entirety] focuses on the tension buildup in two ongoing market situations, which provides a fascinating real-time case study…
Our experience has shown that the huge imbalance in positions between the commercial producers selling forward production and the speculators’ buying of anticipation typically resolves itself in the fundamental direction of the commercial traders’ collective prediction. The gold and soybeans rallies are about to find themselves out of gas.