Where Are 2004's Hot Market Surprises? Contraseasonal Moves in 2003 May Have Stolen Some of the Thunder from Potential Moves in 2004, but Analysts Still See Opportunities for Runups in Several Neglected Commodities and Possible Declines in Some Financial Markets

Article excerpt

A funny thing happened to analysts on the way to forecasting the hottest markets of 2004: Some of their most likely candidates--soybeans, cotton and copper--staged contraseasonal rallies that made them big movers in 2003 and left their 2004 prospects up in the air.

But 2003 was pretty much like that Analysts were pretty well on target a year ago when they made some relatively safe forecasts about a continuing shift from paper assets to physical commodities, volatile energy and financial markets due to military conflicts, a weaker U.S. dollar, a "bubble" in interest rate futures and a potential double bottom in the U.S. stock market ("What looks 'hot' in 2003," December 2002).

The potential bear flag on the U.S. dollar index monthly chart in that article did turn out to be a good predictor of the low when you subtract the distance of the January-July 2002 "flagpole" from the flag breakout point to get a target around 91, coinciding with the 1998 low (see "Hitting the target," right). And the July and October lows in the S&P 500 did turn out to be a double bottom as suggested.

WHO WOULDA THUNK ...

But who could have expected interest rate futures would extend their bubble as far as they did and then virtually crash? Or who could have thought soybean prices would rally sharply into harvest? Or who could have predicted the most shocking move of all in 2003, the rise of live cattle futures to more than $100 per cwt.?

"If I told you a year ago that the discovery of a single case of 'mad cow disease' in North America would propel beef prices to all-time record highs, you would have asked me what I was smoking," quips George Kleinman, president of Commodity Resource Corp. in Lake Tahoe, Nev., and Trends in Futures editor.

"Seasonal" describes "normalcy," notes Jerry Toepke of Moore Research Center in Eugene, Ore. "The more ingrained is normalcy, the more consumers and producers come to depend on it and the more vested interests maintain it," he says. "Such normalcy requires truly powerful forces. The major trends in cattle, bonds and soybeans all had contraseasonal components. The odds of such moves are always slim, precisely what makes them difficult to detect, dangerous to ride."

With that backdrop in mind, here are some nominees for what might be the "hot rides" in 2004.

PHYSICAL COMMODITIES

As mentioned, the surprise moves have already been made in some markets, generally those associated with buying by China that has some thinking about potential parallels to the early 1970s when Russia took advantage of U.S. farm program provisions to buy huge quantities of grain quietly before the market really understood what was happening. That "great grain robbery" was one of the catalysts for the wildest commodity price explosion in U.S. history.

Although the circumstances do not seem set up in the same way to make China another Russia, that could be one of the surprises of 2004.

"A look at the monthly Commodity Research Bureau (CRB) Index does show the overall state of the commodity markets is a bullish one," notes Jim Wyckoff, proprietor of Jim Wyckoff on Markets, a trading advisory service in Cedar Falls, Iowa. "Gong back almost 20 years, the CRB is in the upper third of its recent historical trading range."

The CRB Index is again pushing up against resistance from the mid-1990s highs (see "Stepping up ... or back?" above), and the rise in the larger CRB raw industrial index has been broadly based, thereby increasing the chances that the bull market will persist as the global economy improves, according to analysts at BEA Research in Montreal (see "Taking off," above).

Analysts see several low-priced candidates that might extend the bull move in commodities. For Wyckoff, that commodity could be com, and the pivotal fundamental factor could be China, where a poor crop may turn that country from a corn exporter into an importer. …