All News Affects Markets Equally

NOT ALL NEWS AFFECTS MARKETS EQUALLY    

Hurricane-related damage in 2005 played a major role in the reduction of supplies to the sugar market more so than it did in orange juice. Also, the fundamental backdrop of the sugar market was more significant than the orange juice market because it has a dual role: Sugar is a food product, and it is used as a biofuel to make methanol. It set record price gains in 2005, especially as energy prices surged. Raw sugar prices more than doubled in 2005, climbing and making new 24-year highs. Brazil, the world’s largest producer, uses most of its crop to make fuel because of the high cost of gasoline. With that information, we would expect that after Hurricanes Katrina and Rita impacting the Louisiana crops and then Hurricane Wilma making a direct hit on Florida’s crop, prices would take off like a rocket! But don’t forget that sugar is produced all over the world and that there are sugar beets and sugar cane. It is almost impossible to measure inventories from all growing regions of the world, and the market knew that after Hurricane Wilma hit. The fundamental event that impacted the orange juice market had a different effect there than it did on the sugar market.

As you examine Figure 1.33, notice that prices actually decline after Hurricane Wilma. It took almost one month for the market to realize that there was a significant loss in Florida’s crop, and speculative money pored into the market to take advantage of higher prices. A Trend Traders technical price break signals to get long this market, and substantial profits were made. It may appear that the fundamental and technical outlooks were not in sync; and by late January/early February of 2006, traders started to sense that the market was getting slightly ahead of itself, or overbought. Traders who were long started to liquidate some positions in preparation for the USDA’s monthly crop report. If you look closely at Figure 1.33, the very high of the market was formed by a candle pattern named a shooting star. (Chapter 7 focuses on how to spot reversals like this one.) The market did not behave according to what the fundamentals dictated. Prices rallied in a delayed effect and then continued higher on speculative buying interest.

What I want to illustrate next is how markets do not act according to the following:

·       What fundamentals dictate.

·       Common sense.

·       Rational emotional intelligence.

The high was made in the sugar market on February 3 at 19.65, one week earlier than the USDA crop report. Table 1.1 shows the actual government report, the boldface type indicating that total sugar supplies increased from 11,870 to 12,026! But best of all, total usage declined from 10,523 to 10,365! Ending stocks show there are more surplus inventories. Since that report, prices have declined significantly.

Therefore, remember: Fundamentals do not always jibe with what the charts show. Think like a fundamentalist but trade technically.