Kub's Den

The Markets' Summer Vacation

Elaine Kub
By  Elaine Kub , Contributing Analyst
Volume for the S&P 500 Index, and combined total volumes for corn, soybean, CBOT wheat, crude oil, and gold futures. (Data from DTN ProphetX)

Welcome to August, a month when American families hit the road, American workers hit the lake and Europeans generally just board up their shops and leave their jobs behind for several weeks in a row. Even a lot of North American farmers I know, as long as they're not harvesting wheat or baling hay for cows, manage to sneak in a vacation sometime during August, even if it's only a few days at the county fair.

So while everyone is off eating ice cream somewhere on a sunny beach, who's left to make sure the global financial system keeps running? The computers, I suppose, still chewing up their charts and spitting out their algorithmic trades.

Actually, that flippant answer may be true and more helpful than we realize. Overall trading volumes for both stocks and commodities have risen in recent years as algorithmic trading systems have grown more numerous, which of course has been a boon for the fee-collecting exchanges. These systems may either remove some of the threat of spooky price movements by adding liquidity to the markets, or they may sometimes exacerbate spooky price movements by stampeding together in pursuit of a trend.

It really was the case as recently as the 1990s and early 2000s, back when most financial activity was dependent on human beings actually being physically present in the cities of New York or Chicago, for instance, that trading volumes could become dangerously low during the month of August. Even in 2018, stock traders are rightly concerned about thin trade potentially causing volatile price swings during the month of August, a timeframe that's historically known for seeing strange, sudden jumps and dives in market value. (Remember the S&P 500's 10% collapse during three sessions in late August 2015?)

Should grain traders be equally wary?

First of all, let's consider more recent examples of August stock trading to see if the phenomenon still exists. Stock investors are increasingly willing to steer away from active stock-picking strategies and instead just use passive, buy-and-hold, index-wide strategies. In 2014, the average daily trading volume in the S&P 500 Index of stocks during August was only 78% as active as the average daily trading volume during the other 229 trading sessions of that year. In 2015, there was the big Chinese Black Monday that sparked heavy trading volumes in the last two weeks of August. In 2016, August daily volumes slumped to only 64% of the volumes seen during the rest of the year. Last year, August volumes were 96% of non-August averages.

Now how about commodities? I looked at a sample of different markets including corn, soybeans, CBOT wheat, NYMEX WTI Light Sweet crude oil futures and Globex gold futures. Some seemed to experience a slump in trading volumes during some recent Augusts. Some didn't. There was no apparent sector-wide pattern.

Except for soybeans -- they had a very clear pattern. Daily trading volumes during August have been 82%, 59%, 94% and 71% of the daily trading volumes during the rest of the year in 2017, 2016, 2015 and 2014, respectively. August really is a uniquely quiet month for soybean futures trade. But, because commercial traders far outweigh the "managed money" investors in the soybean futures market (typically holding about 2.5 times as many futures positions as the speculators do), let's not attribute the low August volumes to investors' vacations. Instead, it's just a legitimately quiet time for U.S. soybean business, without a lot of vessels being filled at the ports and without newly harvested bushels being purchased and hedged either.

In contrast, corn futures trading volumes during August seem to closely match their volumes during the other months of the year (animals keep eating every day of the year). And wheat futures trading volumes are particularly high during August while newly-harvested bushels are changing hands. During the past four years, August wheat trading volumes were anywhere from 111% to 123% of the average daily trading volumes from the other months of the years.

Speculative investors have been heavily net short in corn, soybean and soybean oil futures, as recently as last Tuesday anyway. There may have been a last-minute burst of short-covering liquidation during the past week, perhaps motivated by a desire to shed risky assets before the August vacation season hits and the outside markets get jumpy.

And that really is the risk, isn't it? Not that the grain or oilseed markets themselves will do anything strange during August, but that the outside markets might. The agriculture industry is still hard at work, perhaps as hard in August as at any time. Of course, unpredictable announcements about U.S. trade policy might spark volatile movements regardless of how thin or thick trading volumes might be. But for the most part, grain traders should feel free to take their usual summer vacations. The markets will keep working in the background and they'll still be there when you get back.

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.comor on Twitter @elainekub.

(SK/BAS/BE)

Elaine Kub