Lesson 40: "A Possible Squeeze Play"
On Wednesday, September 26th, 2001, the May 2002 Chicago Wheat Futures
contract closed at $2.88. This was down ¾ of a cent for the day, still
ending up 1-cent above Mrs. B's hypothetical purchase price. Remember this
number, "down ¾ of a cent".
On Wednesday, September 26th, 2001, the December 2001 Chicago Wheat Futures
contract closed at $2.75 ½. This was up 4 and ¾ of a cent for the
day. The difference between the December 2001 contract advancing 4 ¾
cents and the May 2002 contract declining ¾ of a cent is 5 and ½ cents.
The nearby futures contract (calling for delivery in December of 2001) and the distant
futures contract (calling for delivery in May of 2002) thus changed their price
relationship by 5 and ½ cents. December 2001 advanced 4 ¾ cents
and May 2002 declined ¾ of a cent. What happened today to these two futures
contracts could be viewed as a "squeeze on the nearby".
Why, on the same day, would a nearby contract rise 4-cents while, at the same time,
a distant contract decline 1-cent? Generally, the answer could be explained
as follows: The people who bought cash wheat and wheat futures contracts
on September 26th, 2001, want wheat for immediate needs. These buyers
are willing to bid up the nearby price of cash wheat and the December futures contract,
but they are not willing to bid up the distant price of the May 2002 wheat contract.
Why would someone want wheat now and not be worried about the price of wheat not
delivered until May of 2002? The first thought that comes to mind is that
wheat is needed in the current cash and futures markets in order to meet a strong
nearby demand. Where could this demand come from? It is possibly a demand
stimulated by the need for wheat supplies to quickly ship to foreign countries.
If millions of refugees are starting to assemble on the borders of Pakistan, there
may be a plan to feed some of those refugees with wheat available in the current
cash markets of the United States. This could explain why you might see the December
2001 wheat futures contract advance 4-cents while the May 2002 wheat futures contract
might decline 1-cent. "A horse, a horse, my Kingdom for a horse"
expresses an urgent and immediate need. A King might need a horse in the middle
of a battle; he might not need one seven months from now. This is known
as "a squeeze play on a King". It is an immediate need for which
a King will pay a premium to satisfy.
Did someone buy wheat in the cash markets today in order to have wheat immediately
available to ship to foreign countries between now and December? And if such
is the case, what does this mean for wheat prices over the long term (six months
to a year)?
The general rule is that when there is long-term major bull market in a commodity,
one of the early signs of such a bull market is often the presence of a squeeze
play in the nearby futures contract. The commodity is needed nearby
to meet short-term demand and so prices move up short-term. Then the need
may continue. If it does, prices may continue to move up. What Mrs. B witnessed
today appears to be the nearby price "squeeze" of the December 2001
wheat futures contract. If this nearby demand for wheat continues,
then all futures contracts should eventually see price strength. For now,
Mrs. B will simply sit back and watch. She will watch to see if today's
"squeeze play" in the December 2001 wheat futures contracts
was a one-day event or the start of a major bull market in all contracts.
Mrs. B knows that her stop/loss order was not hit today. It is eleven-cents
below current prices. Mrs. B also knows that tomorrow should be an interesting
day for spectators like herself. If today's strong wheat market for the December
2001 contract continues tomorrow, how will this affect the price of the May 2002
contract tomorrow? By this time on September 27th, 2001, Mrs. B
should know the answer to that question.
Proceed to lesson 41 by
clicking here.