The Difference Between Bull & Bear Spreads in Commodities

Today’s financial climate has led to an increasing number of people looking into adding different income streams to supplement their income. In fact, more and more, having a ‘side hustle’ is starting to be considered as necessary rather than an outlier. 

Rather than taking on a second full-time or part-time job, though, many are looking at ways to make more money through investments, whether with stocks and bonds, commodity trading, or mutual funds. 

When investing in agricultural commodities, you have probably realized that there are many things to learn. First, there are a variety of different agricultural products available for trade, each with its own nuanced market and many factors influencing global supply and demand. Plus, there are constant price movements and market conditions to follow and understand. And don’t forget about the unpredictable impact of weather!

In reality, there is too much data available for one person to analyze on their own effectively. By using the gold-standard data management system like DTN ProphetX, you get the information you need when you need in the format you prefer. 

Becoming proficient in measuring and managing financial risks in trading is essential for success in your investments. Learning different terms and market indications is also essential. Take a look at one of them here, bull and bear spreads: what they mean and indicate about the market.

 

What do the terms ‘bull’ and ‘bear’ mean? 

Financial markets are often cyclical, following a trend of rising or falling prices. When prices are decreasing or showing very slow movement, this is called a bear market. On the other hand, bull markets are when the prices for a certain commodity increase or are expected to rise. Similarly, you can use the terms’ bear’ and ‘bull’ to describe an investor’s outlook on the market.

For example, an investor can be ‘bullish’ on the market, entering into trades on the assumption that prices will continue rising. The opposite would be true of an investor who is ‘bearish’ on the market, making trades based on his belief that prices will fall. 

Of course, commodity market prices are constantly changing – every second of the business day, there are fluctuations as the price moves higher or lower. Because of this, the terms bear market and bull market are reserved for when the overall direction of a market continues for an extended period of time. Otherwise, each day would be categorized into micro bear and bull markets, which don’t give a true indication of market direction. As a general rule, market prices would need to increase by at least 20% after decreasing by 20% or more. 

Bull markets can last for months, or even years, often following bear markets. For example, 2009 to 2019 saw the longest bull market in stock market history. Of course, over those ten years, there were some dips in the stock market. 

Still, overall, after the famous market crash in 2008, prices began rising again in 2009. They continued on the increasing trajectory until the start of the COVID-19 pandemic in early 2020.

Perhaps the most famous bear market in history was the Great Depression in the 1930s. A period marked with an economic downturn and an increase in unemployment, many investors sold their stocks in search of more financial security, accelerating the decline in market prices. Again, this bear market followed the bull market before it, when the economy was high in the Roaring 20s. 

 

Bull market spreads

In the commodity markets, there are spot prices (current price for the commodity) and futures prices (price for a specific time in the future). Corn, for example, has contracts for March, May, July, September, and December. A bull market spread happens when there is a higher demand for the front-month contracts (the closest month contract) than those farther out in the future. 

Looking at the corn prices for October 27, 2021, as an example, we see that:

• December contracts were at 554.6, up 11.2 on the day, 
• March contracts were up 11.0, 
• May was up 10.6, and 
• the July contracts were up 10.2. 

This pattern means that the demand for the front-month supply is strong enough to allow commercials to pay a higher price for the physical commodities. This bullish sign is especially true when the front-month is in or near delivery. 

 

Bear market spreads

Bear market spreads are the opposite of bull market spreads. Using the same day, October 27, 2021, as a reference, let’s take a look at the gold contract prices:

• October gold contracts were at 1793.3, up 0.6 on the day,
• the November contracts were at 1795.3, up by 2.8, and
• December 2021 contracts were at 1797.3, up by 3.9.

These numbers show that there is less desire to take on supplies right now, causing the front-month bid to fall. This bearish sign shows that current demand is lower.

 

Take your commodity trading to the next level with DTN ProphetX

Commodity trading can effectively diversify your financial portfolio, but it isn’t an easy, hands-off business. When equipped with the best tools available, it makes your job a lot easier. 

DTN ProphetX boasts a range of features designed to keep you profitable, including:

• Mobile-friendly app
• Exclusive market information
• Sophisticated charting
• Customized alerts

Set your business up for success by relying on the best data available. Learn more about how you can put it to work for you and let the results speak for themselves!