It is not as important what the Speculative Funds, Commercial Hedgers and Index Funds have done from one week to the next as it is critically important what they have done over the course of weeks and months. The indicator I have developed uses moving averages as a way to accurately measure the longer term supply/demand trends of these three constituencies. Thus, short term gyrations do not mask the true money flow direction of the market.

The important thing to remember is that Large Speculators are like sprinters. They run fast and hard and they move markets. Commercial hedgers are more like turtles. They are always on the other side of the trade to the speculators and slowly increase their supply in an up market or gradually increase their buying in a down market. Commercial hedgers create the liquidity in the market.

Indexers are long only funds and are typically not allowed to go short. They must buy all the components of an index in the right percentages to maintain integrity with following the index’s performance. They are not typically actively managed funds. If money flows into the Index funds they must buy all of the components of the index and if money flows out of the Index funds they must sell all of the components of the underlying index.

They also must rebalance typically every quarter to maintain a true direct relation to the index. For example if Corn goes up 50 percent during a quarter and Soybeans are unchanged then the funds would have to sell corn and buy Soybeans to re-weight the Index Fund back to the appropriate percentages as prescribed by the index. At quarter end is also a time that new monies that have come into the fund can be deployed in a larger scale more readily. Hence, quarter end can be a time a great volatility in commodity markets when these index fund activities are transpiring.

When the Large Speculative Funds and Index funds are buying more aggressively than the Commercial hedgers are willing to sell, the market must go up until supply and demand get back into balance. When Large Speculative Funds and Index Funds are selling more aggressively then the Commercials are buying, the market must go down until the supply and demand get back into balance. It is a very straight forward and simple approach.

At the end of the day, it means very little what anyone person thinks the fundamentals or technical are saying about a market. What really matters is what the Large Speculators, Index funds and Commercial Hedgers think the technical and fundamentals are saying about the market. Recognize how they are acting and you will have a better sense for the character of the particular trend at hand. Let us look at a real world example to illustrate this.

Below I have a 3 year chart of Corn. Notice that back in September of 2006 the red line crossed back over the blue line. This indicated that the buyers were exceeding sellers and that the money flow in the market was showing a positive turn. Also notice that the money flow kept coming into the market until it peaked in late February. When the money flow indicator signaled a buy in September of 2006 it was accompanied by an oversold RSI index. When both indicators confirm a buy signal a recommendation is put out to buy. Let’s take a look at the situation in Late February.

As you can see the RSI Index was extremely overbought and the money flow indicator began to turn down. When these 2 conditions exist caution is warranted and a more defensive posture is required. When the RSI is over bought and the money flow indicator starts to decline a recommendation to sell will be made to subscribers. A supplemental sell signal will be issued to subscribers when the red line crosses the green line as it did in late March indicating that the money flow has accelerated and that sellers have becoming more dominant in the market. The money has continued to flow out of the Corn market until stabilizing just recently.

I would like to make another point regarding the rally in late June. Notice the market made a big move up to the 425 area but that the money flow indicator did not CONFIRM THIS MOVE HIGHER. This was a classic example of a market that was going through a false rally. When a market is moving up but the money is Not flowing into that market the sustainability of such a move is very suspect. When such divergences exist a sell (buy in the opposite case) will be issued to subscribers.

Once again I believe this Money Flow analysis is powerful and gives a valuable tool when used in combination with other considerations. Of course nothing is perfect and there will be times when this system will not perform as well. But in the 15 years of managing markets I have come to appreciate the liquidity factors in markets and be able to benefit from reading the signals between the tea leaves

3-Year Corn Chart

Money Flow Indicator



RSI Index


If you have any questions regarding the above analysis or would like to look at a different agricultural market then please call me at 888-535-5525 or e-mail shawn@hackettadvisors.com.