First I want to discuss risk. Then I’ll discuss a way to spot the corn price bottom and why corn prices--which collapsed more than $2 per bushel last month--have now fallen into an attractive area.

When someone asks me what I do for a living, and I tell them I trade futures, he/she replies, “Wow, that’s a really risky business.” This retort always comes from folks who are quite comfortable with their “safer” bond and/or stock portfolios.

Well, I have some breaking news for you; today it’s all quite risky.

Recently, my stockbroker recommended I buy a Citicorp new issue preferred stock for my retirement account. It came out at $25 per share, paying an 8.5 percent dividend. It seemed fairly safe to me. After all, Citicorp is in that “too big to fail” (TBTF) category, but the price has now fallen about 12 percent in just a few months, more than offsetting my annual dividend. I wanted to understand more so I Googled “Citicorp Preferred” last Friday and found this posting from The New York Times business section:

Citicorp’s preferred stock rating was reduced to A+ from AA-, the Standard & Poor’s Corporation announced yesterday. The lower rating affects $640 million of outstanding preferred stock, plus $500 million of stock for which a shelf registration has been filed with the Securities and Exchange Commission but not yet sold. Standard & Poor’s said the lower rating was issued to draw attention to the increasing role that preferred stock is expected to have in Citicorp’s capital structure. With a push from Federal regulators, Citicorp and other banking companies have been steadily increasing their issuance of preferred stock to strengthen their balance sheets and increase their capital. Citicorp, for example, has issued $640 million in preferred stock plus about $1.3 billion in debt under terms that qualify it as capital in the eyes of banking regulators. The next-largest issuer was the Bank of America, with about $400 million in preferred stock and about $1.2 billion in debt issues.

This news isn’t too surprising, of course. All the banks have been looking to raise money in recent weeks to dress up their balance sheets during a trying time. I first saw this article it last Friday, but it was a posting from May 29. That’s May 29, 1985. History repeats.

This is what the Citicorp (“C”) chart looks like right now, down to about $18 per share from $55 per share earlier in the year. It’s looking fairly cheap.

Citicorp 2008 Daily Chart

Source: Commodity.com

Sure, it looks cheap, but how do you define cheap? In 1990, Citicorp was trading for less than $2 per share. This is what cheap really looks like:

Citicorp 1990 Daily Chart

Source: Commodity.com

Henry Ford would roll over in his grave if he saw where his stock price was trading today. Last week NYSE Euronext, the stock for the entire New York Stock Exchange, hit its lowest price since it went public.

Check out the chart below. It depicts Elan Corporation, the highflyer biotech firm that went public a few years ago at about $15 per share. Its drug Tysabri was originally hailed as a breakthrough in the treatment for multiple sclerosis. However, the company confirmed last week additional cases of a potentially deadly brain disorder were confirmed in the drug’s trial users. The chart tells the rest of the story.

Elan Corporation

Source: Commodity.com

My point is the waters are treacherous in all the major asset classes right now. I’m not trying to minimize the risks inherent in futures trading; I’m simply warning you in case you’ve missed the fact that it’s all quite risky right now.

The corn market collapsed more than $2 per bushel in July. I’m old enough to remember when corn traded for less than $2 per bushel for years, and that’s not ancient history.

I see corn prices in an attractive area right now. However, the trend remains down at the time of this writing. Corn prices dropped more than 20 cents per bushel last Friday. How do we know when it’s hit bottom? No one will ring a bell to tell us, that’s for sure.

There’s a powerful, predictive tool that just could ring the bell for us, and it’s worked quite well for corn over the years; it’s called open interest.

Open interest is a powerful technical forecasting tool available to only futures trades--not in stocks or other markets. If you’re interested in a full discussion of what open interest is and how it works--including my six profit rules for analyzing open interest--shoot me an e-mail at info@commodity.com. Just write “OI” in the subject line, and I’ll e-mail you my six rules.

December Corn

Source: Commodity.com

In terms of the chart above, open interest did provide valuable forecasting information. It peaked on June 13 at 1,433,923 contracts. This is labeled as “OI peak” on the chart. The close on that date was 765. The market continued to rally as high as 799.5 in the electronic (796 in the pit) until June 27. However, during this last surge higher, open interest fell almost 100,000 contracts to 1,343,348.

Rule No. 3: If prices are in an uptrend and open interest is falling, this is a bearish sign. Open interest analysis gave us an excellent warning sign that the internal strength of the market was actually weak just at the very point it looked the strongest.

Open interest continued to fall, bottoming on June 10 at 1,273,928 (labeled “OI trough” on the chart). On this date, the market had fallen about $1 from the top with about 160,000 contracts liquidated out. Then open interest once again began to rise.

If the market had turned back up, this would have been a bullish sign. However, it continued lower as open interest rose. This was an excellent bearish indication as outlined by Rule No. 2: If prices are in a downtrend and open interest is rising, this is a bearish sign.

This rise in open interest peaked on July 18 at 1,313,707, then declined to new lows at the end of the chart. Open interest trough No. 2 took place last Thursday. According to Rule No. 4, this is a bullish leading indicator: If prices are in a downtrend and open interest is falling, this is a bullish leading indicator. 

So here we are; the market is still in a major down. However, open interest may--or may not yet--have bottomed. It’s gone up one day and, although one day means nothing in the big picture, this may be the start.

Listen for that ringing bell, Rule No. 1: If prices now start rising once again and open interest rises with it, this is a bullish indicator. If you trade corn, watch for this. I’ll be watching for it for my premium service, Futures Market Forecaster, subscribers.

Have a good week, and try to avoid those treacherous waters.

Speaking Engagements

We invite you to tune in as KCI’s LIVE Webcast events air from the 30th annual Money Show San Francisco. The editors will be presenting their latest insights and recommendations surrounding this year’s central theme “Tech and Biotech Investing.”

Registration is FREE and can be completed at MoneyShow.com, so please check out the events and tune in Aug. 7-10, 2008.

We also have a special invitation for our readers. KCI Communications, Inc., publisher of Commodities Trends, is organizing an exciting 11-day investment cruise Dec. 1-12 through the Caribbean and Panama Canal. Participants will have the opportunity to meet and chat with my colleagues Roger Conrad, Gregg Early, Neil George and Elliott Gue.

This will be a unique opportunity to step away from your daily routines, relax in one of the most beautiful parts of the world and share analysts’ knowledge and passion for the markets. During the sail, you’ll not only explore the cerulean splendor of the Caribbean, but you’ll also delve deep into current markets in search of the most profitable opportunities for your portfolios. You’ll also have the rare chance to sail through one of the world’s engineering marvels, the Panama Canal.

It’s always a special treat to meet and talk with subscribers in person, and we couldn’t have picked a better setting than aboard the six-star Crystal Serenity. This is sure to be an especially memorable experience. We hope you’ll join us.

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