We nibbled on limited-risk oil plays earlier this week, but after yesterday’s rally, we are comfortable getting more aggressive. For instance, the December $105 call can be sold for a premium suffici…

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As always, there are no free lunches; the wall of worry is steep, and so are the risks. In our view, it has taken all the stars aligning to trigger the corn rally we see today. It started with hot and dry weather, was aided by the USDA’s yield estimate coming in below trend, then the Pro Farmer crop tour revealed yield estimates even lower than the USDA’s, and finally, Ukraine’s grain exports are being threatened by the war. We have questioned whether this pace of bullish news would continue to support lofty prices, but thus far speculative buying has picked up the slack.

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We don’t think the release of the Venezuelan oil deal was timed to counteract the impact of the first US aggression on Iran in about 30 days. It probably worked; oil is up only $2.00 to $3.00 amid el…

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Fake news and supply data circulating in commodity markets are as old as time. Commodity market data, particularly outside the US, is generally collected and/or reported by parties that stand to benefit from specific price movements. We have recently seen two startling examples: the Pro Farmer Crop Tour, which consists of about 100 volunteers from the ag industry (marketers, analysts, elevator operators, farmers, etc.) who take randomized samples of corn and then assess a crop yield estimate. Most of these volunteers are honest dealers, but it is naïve to assume that a group of people who benefit from higher corn prices would not reach a partially biased conclusion.

We are seeing a similar massaging of data in the oil market. Even if I were standing on the shore of the Strait of Hormuz, I probably wouldn’t know exactly how much oil is coming through. US energy officials have said that 8 to 9 million barrels of oil are moving through each day. That figure is probably too optimistic, but the visible ships crossing with trackers on are artificially low because they don’t include dark ships traveling through the waterway. Dark ships are those that have turned off their trackers and therefore don’t appear in the official ship counter reports. We don’t know, and will never know, how many, but some estimates suggest that 80% of traffic is dark. Either way, it is fair to say that far more oil is leaking than the official data suggests; if it weren’t, we would probably see much higher prices. It wasn’t that long ago that most were convinced anything more than a few weeks of Hormuz closures would devastate oil supply, forcing prices toward $200.

Markets get tired of war headlines. We saw this in 2022: the war between Russia and Ukraine didn’t have to end, nor did the Russian sanctions have to end, for oil prices to retreat from the initial war high. More recently, Ukraine has attacked Russian oil infrastructure at least 30 times in the last month, and Russia’s crude production is the lowest in six years, yet WTI is still consistently making lower highs.

Regarding today’s conflict between the US and Iran, not only is the war not ending, but they are taking the economic war to the next level via “Operation Economic Outcast.” Today we learned that this means Iranian sanctions will also apply to anyone who does business with Iran (secondary sanctions). Plainly, the administration has communicated that they have no intention of de-escalating the war and are willing to play the long game, yet oil is down on the news! A few months ago, this might have been good for a $10.00 intraday rally.

Perhaps the most interesting aspect of the never-ending oil headlines is the fact that we have forgotten about the global cartel. There was a time when OPEC was all that mattered for oil prices; those days are over. OPEC has been slowly bleeding additional supply into the market, but with very little fanfare. OPEC has become an afterthought.

From a fundamental perspective, US rig counts have been on an uptrend for over a year and a half, despite stabilization in recent weeks. Additionally, the oil market has been in persistent backwardation, meaning front-month futures contracts are trading at a premium to the back months. This is important because most speculators are playing in the front of the curve, and the institutions and hedgers are playing in the back end. Backwardation suggests the more sophisticated market participants expect lower prices in the future.

Also, in favor of the bulls, both OPEC and the Energy Information Administration (EIA) are predicting an annual decline in oil demand for the first time since 2020. And finally, the US dollar collapsed last week on the Treasury buyback announcement, but I am not sure that was the right reaction. The Treasury move isn’t adding liquidity to the system; it is merely stabilizing an asset with money that already exists. However, we do recognize that Treasury buybacks are a gateway drug to print money. Nevertheless, the dollar held its 200-day moving average, so there is still a chance that the currency markets will work against commodities, particularly crude oil.

Going to the daily chart, we see that the RSI (momentum indicator) has been making lower highs, and prices have mostly done the same. We suspect that will continue; if so, the rally should be contained between $88.00 and $91.00 (the October contract high and the insanity pivot line), with a natural retreat target of $72.00 (the 200-Day moving average and the trendline).

The weekly chart seems to agree that the crude oil bull is wounded. The current pattern looks very similar to the 2022 pattern. Once the price declined below the black pivot line, it acted as a ceiling. If that continues to hold, rallies will be reversed in the low-$90.00s, with the 200-week moving average ($72.00) as the first downside target, with even lower targets in the $60.00s and $40.00s if fundamentals swing in favor of the bears.

The corn market bulls have enjoyed a perfect storm of bullish fundamentals. The stars aligning have triggered a spectacular counter-seasonal rally. It started with weather concerns (hot and dry), then it was reignited by a bullish USDA report (lower yield estimate), then the Pro Farmer Crop Tour offered a yield estimate 10 bushels below the annual trend, and finally the US dollar collapsed on news that the Treasury would be buying more of its own debt securities. It is rare to see this much consecutive favorable news. With prices already accounting for low yields and a weaker dollar, we have to wonder if there will be enough positive news going forward to sustain prices. After all, markets are forward-looking, and we have harvest coming up around the corner (harvest generally pushes prices lower).

The December corn futures contract is trading near $5.20, with the RSI oscillator suggesting prices are overbought and a reliable trendline standing in its way. The December $5.00 puts are only 15 cents ($750), and we were just there ($5.00) Friday morning. 

BUY DECEMBER CORN $5.00 PUT

Cost = About 15 cents or $750 plus transaction costs.

Margin = $0

Risk = Limited to the cost of entry

Maximum Profit = Theoretically unlimited.

Expiration Date = November 20

Days to Expiration = 88

DeCarley Trader/StoneX Platform Symbol: 

P.ZCEZ265000

KEEP IN TOUCH WITH US REGARDING ADJUSTMENTS, EXITS, ETC.!!! Because each client has different circumstances, we are more comfortable offering trade maintenance support individually.

*There is a substantial risk of loss in trading futures and options. There are no guarantees in speculation; most people lose money trading commodities. Past performance is not indicative of future results. Seasonality is already factored into current prices; any references to such do not infer certainty in future price action. 

Yesterday, Treasury Secretary Scott Bessent announced that they will double their budget to purchase longer-dated Treasuries as a tool for yield curve control. The goal is to artificially keep interest rates lower than they otherwise would be by adding buying pressure to the bond market. This sounds complicated, but it is as simple as this: higher bond prices mean lower interest rates, and the more buyers of bonds there are, the lower the rates will be. Specifically, the Treasury upped its budget from 2 billion to 4 billion per operation. To be honest, this isn’t enough to move the needle from a mathematical perspective. For instance, the Federal Reserve, as opposed to the Treasury, has employed similar Quantitative Easing operations in Trillions, not billions. During the heyday of the COVID-era stimulus, a single month of Fed QE Treasury purchases often exceeded the entire expectations of the 2026 Treasury buyback program. In other words, what the Treasury is doing is a rounding error relative to what we have seen the Fed do since the financial crisis. We see the Treasury program as a warning shot to markets rather than the firing of a bazooka.

It is also worth noting that the Treasury has adopted a policy of issuing new debt with short-term horizons while buying long-term Treasuries. In a sense, they are borrowing at lower short-term rates while buying higher long-term rates but aren’t adding liquidity to the system as the Fed did. Thus, it is not an inflationary action. With this in mind, I am not sure if the US dollar had the right reaction to the news yesterday. The dollar collapsed, helping propel most assets higher (stocks, crypto, metals, and even grains), but we aren’t sure we won’t get some buyer’s remorse in these assets next week (and seller’s remorse in the dollar).

To summarize, with Scott Bessent at the helm, the US Treasury has decided to work around the Fed to lower interest rates in the marketplace via yen and Treasury interventions, rather than relying on the Fed Funds rate to lower borrowing costs. You either believe the Treasury Secretary’s operations will successfully alter market psychology, or you don’t, but we would argue that the Treasury might not have needed to step in. Maybe the desired market changes would have taken place naturally. Here are our thoughts.

Speculators are Holding Record Net Short Positions in the 10-Year Note

According to the Commitments of Traders (COT) report issued each week by the CFTC (Commodity Futures Trading Commission), large speculators (those with deep pockets, large contract sizes, and considered the smart money) are not only holding the largest bearish position on record, but its size is obscenely disrespectful to the US Treasury. To be fair, this condition has been persistent since the October 2023 bottom. Since then, rallies have been systematically sold, and this group of traders has been consistently wildly short, with no real consequences. The trend has been their friend. It isn’t difficult to see why these market participants are so confident: US debt has reached $40 trillion for the first time, and our fiscal responsibility is nearly nonexistent.

Yet, if the market is going to punish the US for its debt problem, it would have to punish the rest of the world, too. US interest rates are higher than those in most other developed countries, whose balance sheets are just as horrid, if not worse. I’ll remind our readers that Greece is paying less to borrow money from the global market than the US is.

In 2011, I visited Greece to support a family member in the Special Olympics World Games. At the time, the Greek people were protesting austerity measures aimed at preventing the country from defaulting on its debt. Upon exiting the subway at Syntagma Square, I was tear-gassed by police attempting to thwart the riots. Despite the chaos, Greece defaulted on its debt, and the people were forced to accept cuts to government programs. Does it make sense for Greek bonds to be trading with a lower yield than US bonds? I have yet to be tear-gassed in my home country over a potential debt default, so my opinion is “no.”

Fix Crude Oil, and You Fix Bonds

We’ve already stated that US Treasuries would be markedly higher (interest rates lower) if it weren’t for Japan selling our bonds to raise cash to support their currency. Similarly, if it weren’t for elevated crude oil prices (a sign of inflation and a tailwind for higher yields), the bond market would be sitting at much higher levels and yields at lower levels. We know this because there is a 70% negative correlation between the 30-year bond and crude oil futures contract over the last 180 trading days. Further, we can see the negative relationship with our own naked eyes on a daily chart. As oil prices rise, the bond market falls.

The September oil futures contract is coming off the board today, a time that has a relatively good track record of initiating trend changes. Additionally, this market remains in backwardation (suggesting the market believes higher oil is a temporary phenomenon), and the pattern of higher lows should limit this rally to the mid-to-low $90.00s. Thus, we believe the oil market should eventually return to the $70.00s or lower; if that happens, the problem of higher bond yields would largely resolve itself.

Treasuries don’t Look as Bad as they Feel

Despite the negative rhetoric, the 10-year note has been hovering between 4% and 5% for nearly three years. Further, we have been hugging the lower level of a multi-decade trading range but have yet to completely melt down. There are those calling for a 1980s-style bond route, but this isn’t the 1980s. Technology has been highly deflationary. Fracking has given the US control of its own power supply. And, I don’t think Washington, D.C., has the pearls to let free markets truly reign. In our eyes, a more probable outcome is a floor in the 10-year note futures near 105’0 (yield of 5.4%). The last time yields were this high, investors opted to lock in coupon payments while rates were high. Meanwhile, those high rates were eating away at the economy. Eventually, portfolio allocations shifted from an overweight position in stocks to an overweight position in Treasuries, with a focus on the return of their money, not the return on their money. Although not on most people’s radar, this time could play out similarly.

We aren’t predicting another financial crisis, but traders are heavily long stocks with obnoxious amounts of leverage, and short Treasuries. Thus far, there has been no reason for them to unwind because it has been working, but these conditions have always been temporary rather than permanent. We would expect the Treasury market to put in at least one more low as the oil market attempts to work out supply issues and the market scoffs at the minimal Treasury intervention. However, the die is cast for an epic short squeeze in Treasuries should a catalyst spark the fire. I am not a fan of government intervention in markets, but it is hard to argue that it hasn’t resulted in the desired effect. The 2011 intervention to thwart the Yen rally was so successful that the currency has been in a treacherous bear market since. Likewise, Fed and government operations and programs to create liquidity were designed to force asset prices higher and have worked so well that we have parabolic stock valuations, unaffordable housing, and Pokémon cards priced in the tens of thousands.

According to MRCI, going short January soybeans this week and holding through mid-October (harvest lows) has been profitable in 12 of the last 15 years. With the chart looking extended, RSI a bit sluggish, and the dollar sitting on its 200-day moving average (boosting commodities in recent sessions), it seems all the bullish news might be priced in for the grain market. We like the idea of going short mini futures contracts and purchasing December (standard-sized) soybean $15.00 calls to act as catastrophic insurance, and as a backstop for those looking to scale into extra minis (one standard call fully protects 5 mini futures above the strike price). 

Alternative Strategy

If you want to take a stab at downside risk without much margin, you can consider buying a put outright. A January (not December) $11.50 put is about 9 cents ($450); the $11.80 put is about 16.5 cents ($825). 

SELL JANUARY SOYBEAN MINI FUTURES WITH CATASTROPHIC INSURANCE

SELL JANUARY MINI SOYBEAN FUTURE NEAR $12.50

BUY DECEMBER SOYBEAN $15.00 CALL

Cost = About 3 cents or $150 plus transaction costs for the catastrophic insurance.

Margin = $400

Risk = $2650 if beans are exactly at $15.00 at expiration

Maximum Profit = Theoretically unlimited, but we would be hoping for about $1,000

Expiration Date = November 20

Days to Expiration = 92

DeCarley Trader/StoneX Platform Symbol: 

XBF27

C.ZSEZ2615000

*There is a substantial risk of loss in trading futures and options. There are no guarantees in speculation; most people lose money trading commodities. Past performance is not indicative of future results. Seasonality is already factored into current prices; any references to such do not infer certainty in future price action. 

Last year, the cattle market managed to rally from about August 15th, putting in a last-hurrah rally. This year might be setting up for something similar, but if not, the chart suggests we are likely…

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Being on the wrong side of the metals futures market (or short options) this year has been a wild ride. Accordingly, we hesitate to get over our skis there. That said, there are ways to play with very low and limited risk if you are willing to spend a few hundred on what most would consider a long shot, but might not be as long as it appears.  We have seen gold put together both historical rallies and declines; there is a good chance that pattern repeats. If so, the low $3,000s could be in play! 

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Before we begin looking at charts, let’s define overcrowded trades and explain why it might be useful to have this information. An overcrowded trade is one in which a disproportionately large number of market participants are positioned in the same way at the same time. For instance, if the vast majority of traders with open positions in crude oil are long the market, this is considered a crowded trade.

It might be surprising to learn that market positioning can be more impactful to price than fundamentals. This is because if everyone who is bullish crude oil has already gone long, there won’t be enough additional buyers to keep the trend intact. Furthermore, those who are long would need to sell their holdings to exit the position. If many of those long crude oil futures decided to exit simultaneously, there likely won’t be enough buyers to cushion the price action. This can quickly become a price vacuum in which massive declines occur relatively instantly and in a disorderly manner. In other words, the price volatility and risk stem from the crowding of traders in and out of the same position, rather than logical changes in the underlying asset’s value. In other words, it is a herd mentality phenomenon that repeats like clockwork in financial markets by pushing prices beyond sustainable levels only to bring them back to below a reasonable price. Overcrowded trades are always eventually unwound; the unwinding is generally accompanied by trend reversals, but sometimes it merely acts as a wall to a trend.

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Copper prices have firmed up in unison with the AI trade, but we might be reaching an inflection point. The market is up against resistance on a daily chart, and on the monthly chart we are contendin…

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The impact on the equity market is messier and requires a more macro view. Yet, when comparing charts of the Yen and the S&P 500, we do see an argument for a relationship between the two markets: a declining Yen acts as a tailwind to stock appreciation. Before we analyze a chart comparing the monthly correlation between the Yen future and the S&P 500, let’s briefly discuss the history of the carry trade.

As mentioned in the previous newsletter, the Yen carry trade is the practice of borrowing Yen (money) at low interest rates and investing those proceeds in higher-yielding assets. It is believed that most of this capital has systematically gone into US stocks, but in theory, it is also spread into other asset classes and even countries. This cheap and easy monetary policy floods the globe with liquidity.

As you can imagine, this process puts downward pressure on the Yen and upward pressure on stocks. Further, this is a leveraged position that might not have the required capital backing it to survive volatility. Occasionally, those participating in this strategy are forced to unwind it due to margin calls or in the name of capital preservation, usually due to a sharp rally in the Yen.

The Yen carry trade dates back to the mid-1990s (when Japan lowered interest rates to nearly zero) and became quite popular in the early 2000s. It was largely unwound during the financial crisis because the Yen appreciated, causing mounting losses to force traders out of the position. As a result, the Yen rallied sharply, and US equities sold off (carry traders sold US stocks and bought the Yen to unwind the trade).

The unwinding of the yen carry trade began in 2007 and was exacerbated by the repatriation of funds by Japanese citizens to deal with the infamous Tohoku earthquake. These two events combined to allow the Yen to appreciate to an unfathomable level by 2011, at which time a multi-country coordinated intervention in the Yen reversed a roaring bull.

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Cattle futures have bounced sharply, but can it hold? The bull market in cattle that has taken place since 2020 is one for the history books in regard to resiliency. I don’t recall ever seeing a comm…

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Going long October natural gas futures on August 2nd and holding through September 15th has worked in 12 of the last 15 years. If the chart means anything, we think it could work this year as well. U…

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Going long October natural gas futures on August 2nd and holding through September 15th has worked in 12 of the last 15 years. If the chart means anything, we think it could work this year as well. Unlike oil, which we believe is in a sell-the-rallies environment, we view gas as a buy-the-dips market.

The trend is obviously lower, so we aren’t willing to sell a put. And the upside could be relatively substantial if we break above $3.00, so we prefer not to sell a call either. Instead, we believe a simple long $3.10 call is the best way to play the upside for now, but if you prefer the simplicity of futures, you can consider buying either a mini or micro with a mental stop at about $2.50ish

BUY OCTOBER NATURAL GAS $3.10 CALL

Cost = About 8.5 cents or $850

Margin = $0

Risk = Limited to the cost of entry plus transaction costs

Maximum Profit = Theoretically unlimited, but we would be hoping for a doubling of the premium. 

Expiration Date = September 25

Days to Expiration = 56

DeCarley Trader/StoneX Platform Symbol: 

C.NGEV263100  

*There is a substantial risk of loss in trading futures and options. There are no guarantees in speculation; most people lose money trading commodities. Past performance is not indicative of future results. Seasonality is already factored into current prices; any references to such do not infer certainty in future price action. 

Oil volatility has been wildly elevated amid war-headline chaos. As a result, many traders have been forced to the sidelines due to high margins, high risk, and high uncertainty. We came up with an idea that allows traders to play the downside in oil without much risk or stress using an October put butterfly. 

If you have ever traded a butterfly before, you know there are a lot of advantages such as affordability, low and limited risk, and a wide profit range. However, you also know that, assuming you are right in the direction, most of the profit doesn’t show up until near expiration. In other words, traders become relatively trapped in the position until the final weeks; it is a set-it-and-forget-it type of venture. 

Butterflies are essentially range trades. The goal is for the October crude oil futures contract to fall within the butterfly’s profit range. In this case, it is roughly between $69.40 and $60.60 because we are buying the $70 put, selling 2 $65 puts, and then buying a $60 put for roughly 60 cents or $600 plus transaction fees. The easiest way to look at it is that the trade is making money at expiration below $70; it stops making money at $65. Below $65, it gives profits back before running out of money at just over $60. In short, if oil is above $70 or below $60, the trade delivers a maximum loss of about $600ish. If oil is exactly at $65, the trade pays off $5.00 or $5,000 (minus the cost of entry).  In summary, this trade makes money at expiration if oil is in a $9 profit zone, but oil is a fast-moving target, and it takes some luck to achieve a larger payout.

*IF YOU ARE HOLDING THE PREVIOUS RECOMMENDATION WITH A SHORT $105 CALL AND A LONG 75/70 PUT SPREAD, YOU WILL NEED TO ADJUST YOUR STRIKES LOWER BY A DOLLAR TO AVOID OFFSETTING THE SHORT LEG OF YOUR PREVIOUS TRADE.

 OCTOBER CRUDE OIL PUT BUTTERFLY

BUY 1 OCTOBER CRUDE OIL $70 PUT

SELL 2 OCTOBER CRUDE OIL $65 PUTS

BUY 1 OCTOBER CRUDE OIL $60 PUT

Cost = About 60 to 65 cents ($600 to $650) plus transaction costs

Margin = $0

Risk = Limited to the cost of entry

Maximum Profit = About $4,400 before considering transaction costs if held to expiration and oil is exactly at $65. This isn’t likely, but if oil is in the vicinity, it can pay off nicely.

Expiration Date = September 17

Days to Expiration = 51

DeCarley Trader/StoneX Platform Symbol: 

CLEFE7B0C9DE7149719 (build the spread from the buyer’s perspective and “buy” the spread)

P.US.CLEV267500

P.US.CLEV267000

C.US.CLEV2610500    

*There is a substantial risk of loss in trading futures and options. There are no guarantees in speculation; most people lose money trading commodities. Past performance is not indicative of future results. Seasonality is already factored into current prices; any references to such do not infer certainty in future price action. 

In the big picture, years and months, not days and weeks, we believe the cattle market has probably seen its highs for this cycle. But, when we look at the weekly chart, we see a market testing a tre…

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Despite larger-than-usual short traders in stocks, the E-mini S&P 500 futures aren’t seeing the same thing. Futures speculators with enough size to fall into the “large” category of the COT held sizeable shorts in early June but have mostly unwound them. I am more concerned about the Asset Manager category of the COT, which suggests the group is holding a net long position of nearly a million contracts. Going back 20 years, any time this has been the case, the market has struggled to make progress. Most occasions were followed by corrections (some of them were very large).

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The aggressive AI buildout has been a boon for the copper industry. The industrial metal is a great conductor of electricity and cooling. AI data centers require substantial amounts of copper to combat extreme thermal loads. The metal is also useful in electric vehicles and renewable energy sources. 

As you can imagine, hyperscalers are willing to pay up for copper to achieve their goals; thus, we have seen the price appreciate sharply.  However, a reasonable question to ask is whether the AI build can continue at this pace? Whether copper producers will do what producers always do when commodity prices are high (find a way to bring supply to the market despite challenges?) Or will consumers find an alternative; for instance, data center builders are exploring using aluminum or high-temperature superconductor cables. 

Lastly, as we have noted in previous newsletters, the US dollar is creeping higher. While gold, silver, and crude oil have repriced accordingly, neither stocks nor copper have done so, and perhaps they will. We like buying cheap copper puts with a lot of time. 

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