Futures For You
| INSIDE THE FUTURES
WORLD
Want to learn how the futures markets really work? Dan O'Neil, a principal at online futures and forex broker Xpresstrade (www.xpresstrade.com), responds to your questions about today's futures markets. To submit a question, post your question to our website at https://Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C. |
Dan O'Neil |
ABANDON SHIP
Many commodity markets have enjoyed fabulous bull runs. More recently, though, the rallies have sputtered, and some prices have fallen back to Earth. Was this a commodities bubble, and are we near the end of the boom?
Nobody likes to hold on too long in any market that's heading down. Yet without getting into any specific price forecasts, I would say that investors rethinking the viability of commodities in light of recent downturns in a few signature markets would do well to look at the big picture and consider this actually might be the right time to buy.
Of course, to begin with, there's no sense in trying to deny it. For all of the congratulations that many major commodities have enjoyed from traders over the past couple of years amid sharply rising prices, it's only fair to accept the converse when the bull appears to have been neutered. And there's no beating around that bush in some of these markets. Gold, for instance, saw the glow of a long, steady climb to well over $700 in mid-May tarnish when it tumbled to the $550 range. Several other darlings of the recent commodities runup -- sugar and silver, to name a couple -- have likewise felt the paw of the bear pounding them down from their lofty heights with double-digit percentage corrections. Even crude oil slowed and leveled for a time, despite fundamental supply pressures.
In light of these unsettling developments, we have to ask if we have finally pushed the bubble to its breaking point. Should commodity investors pack up and retreat to the safety of the "three Ms" -- mutual funds, money markets, and mattresses -- and wait for the next boom to begin?
But such good intentions can be misplaced in the commodities markets. Despite conventional wisdom to the contrary, recent corrections in many of these markets may signal a buying opportunity due to the cyclical nature of commodity bull runs, which can average anywhere from 10 to 15 years. Historically, many extended bull markets have seen corrections ranging from 15% to almost 50% before resuming their upward climbs, providing excellent opportunities for long-term investors to get in on the dips.
Already, gold and crude oil have regained their footing and begun ascending. And with continued demand from huge emerging economies like India and China, many experts believe, in fact, that some of these markets could still be in the early stages of an upward trajectory that could eventually span a decade or more. As demonstrated by recent activity, traders should strap themselves in for what could be a bumpy climb, because a bull market in commodities almost never means one free from volatility.
ELECTRONIC GRAIN TRADING
I've heard that the grains are going to begin trading electronically soon. Is this going to be a viable alternative to the open-outcry trading pits?
Yes, it's true -- the CBOT grain complex, one of the remaining bastions of open-outcry trading, is poised to take a big, electronic step forward. By the time you read this, the Chicago Board of Trade will have begun trading its corn, wheat, soybean, soybean oil, soybean meal, rough rice, and oat futures contracts on eCBOT, the exchange's electronic trading platform, even during regular business hours. The trading pits won't initially disappear, as electronic trading will be conducted alongside trading in the pits. In the evenings, after-hours trading will continue to take place on the eCBOT platform.
This is a big deal. Traders have made their preference for electronic trading -- along with its transparent pricing and faster, more accurate executions -- known. Take currency futures at the Chicago Mercantile Exchange. After side-by-side trading was introduced, Globex increased its share of trading volume, and now close to 90% of the volume is electronic. The CBOT's electronic 100-ounce gold futures contract has managed to wrest as much as 40% of the market share from the incumbent COMEX's pit-traded contract, while the all-electronic Ice exchange has captured nearly half the volume in light crude futures from the NYMEX trading pits.
Our prediction: Electronic grain trading is going to be a real winner. Investors will love the speed and accuracy. New participation among those who steered clear of the open-outcry pits will further increase liquidity and improve pricing in the market. Traders (especially those trading through online brokers) will know where they stand in the market at any given moment. And the CBOT stands to benefit from greater trading volumes, since faster executions tend to spur incremental trading.
If you haven't traded grain futures, here's a compelling reason to consider it. These products have always been popular among individual traders, and now that they'll be available on the eCBOT platform virtually around-the-clock, they look to become better than ever. Congratulations to the CBOT for recognizing the needs and preferences of its customers and for making a bold move in the right direction.
© Copyright 2006, Technical Analysis, Inc.
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