Better Decisions: Taking advantage of the 'Dead Cat Bounce'
Tuesday, February 16, 2010
Holding out for seasonal price rallies can make a difference to your selling price
By KEVIN SIMPSON
Crops like corn, wheat, and beans are apt to have seasonal price tendencies, reflecting an annual cycle that is related to production and consumption patterns.
For example, prices of beans tend to rally during the spring planting season. The market usually commands a premium when there is uncertainty about supply. We know the variables that can affect supply – how many acres will be planted, will it be too cold or hot, will it be too dry or too wet. End users willingly pay a premium to ensure delivery of crop at harvest at the same time that producers need to be coaxed to sell forward because of these uncertainties. The result is high prices in the spring followed by lower prices as more information of crop development become available.
An important seasonal play in soybeans is the "Dead Cat Bounce." I've watched this popular move for many decades now. Beans usually drop in price after early September frost scares come and go. As harvest begins, prices drop, gathering momentum as the harvest nears the 50 per cent level, usually around Oct. 3-5. At that point, the seasonal rally generally begins. The cause is likely crushers and exporters competing for newly harvested beans, and early season jitters about South American beans as their planting season unfolds.
Roy Smith, a Nebraska cash crop farmer and student of seasonal trends in beans and corn, says it best. "During soybean harvest, one of the things I watch for is the cash soybean price for indications of the 'Dead Cat Bounce.' Over the years, I have found it to be one of the most useful tools for marketing of soybeans."
This price rally is useful for farmers with beans in, or going into, commercial storage. The rally may have kicked in before storage costs or elevation charges are due. While it is rarely as high as the spring highs, it is an opportunity to add dimes or more to your selling price by holding out for this important rally after the Oct. 5 lows. The five-year average gain by Nov. 4 is US$0.60 per bushel. This year, it was a stunning $1.20 per bushel - double the average.
The chart (Figure 1), is a graphic way of identifying overvalued or undervalued levels for soybeans. In the December issue, I showed a process for splitting the recent high point and important low point into thirds. My assumptions are that when prices push into the top third, sales should be made by producers and when they fall into the bottom third, sales should be avoided. If sales need to be done for cash flow or production reasons, then beans should be bought back using futures or options.
The recent important high was $16.60 in July of 2008. An important cycle low was made at $5.26 in
2006. Thus, the bottom third is $5.26 to $9.05 and the top third is $12.82 to $16.60. It's interesting that the high in 2009 was $12.91 – just into my oversold price zone.
Use these values to guide you in your 2010 marketing plans. BF
Kevin Simpson, CFA, is an Investment Advisor with RBC Dominion Securities in Waterloo.
