Fundamental Events Influence Price Direction

FUNDAMENTAL EVENTS INFLUENCE PRICE DIRECTION    

There is an old saying, “Think like a fundamentalist, but trade like a technician” a great line that applies when trading commodities or any market for that matter. Here is how that line applies to the hurricane situation. The orange juice crop was slightly damaged; there was a reduction in supplies in the southern growing region in Florida. Prior to the hurricane, prices moved higher in anticipation of a loss of inventory; what was unknown was how much higher. The market traded higher after what appeared to be a significant damaging hurricane.

Fundamentally, the market was vulnerable for any further price shocks. Then, as we approached the traditional seasonal frost scare period in mid-January through February, the market would be more vulnerable to increased volatility. In fact, that was what occurred in 2006, as Figure 1.32 shows.

The fundamental supply/demand report outlook, as shown in the U.S. Department of Agriculture’s (USDA’s) monthly crop report, did not reveal a major supply/demand imbalance to warrant higher prices. But a frost scare would! The anticipation that crops would suffer from frost damage propped prices sharply higher. The point is that you need to be aware of what fundamental factors influence a market. Markets do not always move when they should on facts presented, but there are circumstances that can and do make markets move! A hurricane in South Florida before harvest time is one such situation.