DTN Six Factors: Market Coherency is Important

Editor’s Note: This is the third and final post in our series on the DTN Six Factors Market Strategies. It covers the importance of market coherency. Read our other two posts on looking at the market in a disciplined way and price, probability or value.

As we evaluate the six factors over time, sometimes they give a clear picture of what lies ahead and sometimes the factors are mixed, with no clear direction.

For example, Kansas City wheat prices were rallying higher in late May of 2019, but fundamentally speaking, there was no strong bullish argument for wheat. My experience is that time is typically the best remedy for that kind of an incoherent market. Eventually, logic bears out.

Incoherency can represent honest indecision about what is happening in the world or it can simply be a temporary emotional sidetrack. Markets are people, and people can get distracted. Noncommercial positions are often the first place to check for clues of distraction.

A coherent market, on the other hand, where fundamental and other factors agree, can be a powerful driver of prices and of trends. We saw how quickly soybean prices dropped during the summer of 2018 after U.S. planting went well and it became clear that a trade war with China was aging to be a serious threat to U.S. soybean demand.

I don’t remember being taught in college, but in terms of supply and demand, markets are much more fragile than advertised. The 2018 drop in soybeans is a good example of what happens to prices when you scare potential buyers away. If supply and demand aren’t both participating, the notion of equilibrium falls apart quickly.

I always remind DTN customers that markets are people. Sometimes it doesn’t take much to scare one side.

Read more about the Six Factors Market Strategies.