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Opinion

Commodity Insight: Old-timers and the February Break

From 1900 to 2000, approximately, one of the most reliable seasonal trades for the agriculture markets was to sell short or hedge aggressively in the month of February.

The weakness associated with February was so well known, so anticipated and so feared it was given a name. It was called the “February Break.”

However, when commodity values, per se, in 1998 fell to a 54-year low, weakness in February was no longer a sure thing, so to speak. In early 2000, a number of money-managed commodity funds were formed that only played commodities from the long side of the ledger.

The funds were created by Wall Street simply because commodities were woefully undervalued — a 54-year low — and it was assumed, rightfully so, that the line of least resistance for commodity values was higher.

And from around 2000 to 2012, commodities, even in the month of February, rallied more than they declined. In fact, in the first decade of the 2000s, buying almost any commodity was a new and reliable seasonal trade for the ag markets.

But since 2011, the ag markets have been two-sided in February with neither the bulls nor the bears having the upper hand during the second month of the year.

But the old-timers, such as yours truly, have not forgotten about the February Break and the bearish impact it can have on most markets.

Granted, the markets mostly impacted on the downside in February are agricultural markets. Still, I can offer some examples of stocks, bonds, metals and so on being slammed hard in February, as well.

The February Break was and has been cruel and bearish to most markets at some point in time despite the years between 2000 and 2012, when few gave a whit about February — except for the old-timers.

Nonetheless, when the second month of the year arrives, I always remind everyone in my weekly column that oftentimes, in February, “if you are long, you are wrong.”

But over the past years, my warnings about how bearish February can be for a host of markets have been ignored. And that is why I was surprised when ccn.com posted the following headline this week entitled “History says a February stock market crash is inevitable.”

Here are the three main points from the ccn.com article:

• “Sentiment indicators suggest a stock market crash is on the horizon.”

• “Today’s market has become incredibly similar to that of 2018 just before a major market correction in February.”

• “Without a significant pullback, the market is headed into bubble territory.”

And here was their out loud and high-pitched warning: “As the market races higher, investors should be cautious of a February stock market crash that looks all but certain.”

During the years 1900 to 2000, the February Break would, at times, arrive a week early. Or, arrive a week late. This year, with February close at hand, crude oil, silver, cattle and cattle feeders fell to levels not seen since October.

Cotton prices fell back to where they were in November and copper down to levels not seen since September. Soybean prices dropped to a 1 1/2-month low with hog futures hitting a 16-month low.

The major commodity indexes hit five-month lows. All that took place with February but a week away.

Based on history, an argument can be made that the February Break this year arrived a few days early. The weakness seen in recent days may have more to go. Only with the benefit of hindsight will we know for certain how things unfolded.

Most analysts argue that the weakness seen in recent days with commodities and the stock market is due to the coronavirus sweeping China, causing millions to be quarantined and many deaths. From a market viewpoint, the fear is that demand and trade will suffer greatly and prices for commodities will suffer.

But I am not in the camp that believes coronavirus will cause long-lasting damage to trade or demand. Certainly, it will take time to gauge how contagious the illness truly is as well as how dangerous.

I also do not believe the dramatic decline seen in recent days with a host of commodity markets was due entirely to the virus. Playing a big part in the weakness was the infamous February Break that history shows clearly rears its ugly head when the second month of the year rolls around, give or take a week.

Moving forward, commodities may fall further since February has arrived. But any weakness with commodities should end no later than the end of March, just as the growing season in the United States gets underway. After that, the fate of the grain and livestock markets rests with the domestic food needs of China and climate change.

And it will be more than interesting to see if stocks succumb to the infamous February Break as commodities have done in recent days. It will be very interesting, indeed. Stay tuned and remain buckled up. The ride is going to be bumpy.

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