This commentary previously appeared on Real Money Pro on Aug. 31, 2016, at 12:09 p.m. ET. Click here to learn about this dynamic market information service for active traders.
As they say, when everybody is bearish, it is probably time to buy. There are three arguments behind this theory; for starters, if sentiment is overly negative, it is probably fair to say that most of the bulls have sold their holdings and most of those willing to short the market have probably done so. Simply, there is nobody left to buy in a market plagued with bearish sentiment.
The second premise to the argument is that most speculators lose money and, more specifically, the general public has a terrible track record in predicting price. Thus, if the majority of market followers agree on the future of pricing, they will most likely prove to be incorrect in their expectations.
The third aspect of the contrarian theory is that once a market reaches euphoria or despair, prices have probably extended themselves beyond a sustainable level. In short, extreme sentiment generally implies an overbought or oversold market. Although markets can continue in the direction of the trend after becoming overbought or oversold, they have an increased propensity of a trend reversal once this status is reached.
In my opinion, traders and analysts of the agricultural commodity markets have become unreasonably bearish and I see this as a sign of an imminent trend change. To be fair, I've been "long and wrong" in the grains recently, but I still believe the case can be made for a substantial low in both markets in the coming weeks. After all, if the goal is to buy low and sell high, it makes sense to get more aggressive in a market that is historically cheap and at a time in which "everyone else" is looking the other way.
Our friends at Consensus believe the number of corn and wheat bulls has dwindled into the low 20% area, meaning fewer than one out of four market followers is bullish these particular agricultural products. Historically speaking, when bullish market sentiment drops under 25%, it is seen as a market ripe for a turnaround.
Harvest Lows Looming
Corn and wheat prices have fallen to multiyear lows on what is being projected as a historical bumper crop in corn and a healthy supply of wheat. Despite an opposite crop cycle for wheat farmers, corn and wheat tend to trade in tandem. This is because they are used as substitutes for some end-users; accordingly, as corn prices decline into harvest, wheat prices have been following suit. Accordingly, if one finds a reason to rally, the other should also make a move.
It is common for corn to find a low in September or October, at a time in which supplies are the greatest due to harvest. This time around, the market has priced in a surprisingly healthy crop and massive yield. Even if the market is correct about yield projections, the price of corn probably mostly reflects that. As a result, we have to believe the downside is limited. Not only is all of the bearish news out and accounted for, there is still time for harvest complications (weather) or for yield expectations to be adjusted.
Corn prices have fallen over $1.35 per bushel from the summer highs. This is an extraordinary amount of volatility and pain in the chart suggests the move has likely wiped out most of the weak-handed longs. Unfortunately for them, that is precisely when markets are most likely to turn the corner ... as we know, there is no easy money in speculation. The RSI (Relative Strength Index) has dipped below 25 in corn for the first time since July prior to a short-lived yet healthy bounce. Before that, it occurred in April just before prices ran nearly $1 per bushel. If history has anything to say, we should see some sort of firming in pricing.
Even more extreme than corn, wheat has declined over $1.60 per bushel from the summer high and has also triggered a dip in the RSI under 25. With technical oscillators oversold and prices highly discounted from recent history, it is difficult to imagine wheat getting much cheaper.