In the eyes of fundamental analysis, financial markets are like cars driving down a busy freeway. "Bearish" news events are black ice patches that cause the car to swerve suddenly off the road. "Bullish" news events are strong winds at the car's back, helping it run smoothly along.
This kind of logic works fine until one of two things happens: The "car" drives right over the slickest sheet of "bearish ice" without flinching. Or -- the opposite of that -- the "car" loses control and veers into a ditch for no good fundamental reason at all.
Take, for example, the dramatic down-to-up U-turn that occurred in wheat prices back in late June/early July 2010. At the time, the grain stood at its lowest level in nine months. And, according to the mainstream experts, the market's fundamental "road" was full of these bearish "obstacles":
- Drier weather in the U.S. Southern Plains
- A bumper harvest and "abundant global surplus"
- A U.S. Department of Agriculture report that showed a 2% increase in wheat production in July, versus June.
- A 23-year high in U.S. carry over supply of wheat
YET -- instead of crashing, wheat prices put the pedal to the medal in a near-100% rally to the two-year highs we see today. Early on into the trend change, the usual experts cited Russia's worst drought in 40 years as the cause for wheat's sudden upward bias. That, however, was hardly news to the market in late June: Two months earlier, on May 8, Russian Prime Minister Vladimir Putin approved a temporary ban on grain exports due to the "worst heat wave on record decimating crops."
As for seeing wheat's rally off the June lows BEFORE it occurred, the following analysis from EWI's chief commodity expert and Futures Junctures Service editor Jeffrey Kennedy sets the bar:
- July 14, 2010 Daily Futures Junctures wrote: "The one grain market that has convincingly demonstrated that its 2008 sell off is complete is wheat. In fact, recent price action is developing what one could call a textbook five wave advance. This being the case, wheat has begun a months-long journey that will carry prices" up.
August 2010 Monthly Futures Junctures wrote: "Making the case for a higher top in wheat. With all this talk about wheat, the real question is, will it continue to move higher and if so, how much higher. The answer to this question is, Yes."