Jim Cramers Real Money Sane Investing In An Insane World
Also, you can never assume your analysis is infallible. There are always unknown factors—dock strikes, floods, droughts, governmental intervention, etc.—that can stampede the market against your position. That's why you need to use special techniques such as protective stop orders to cover your positions.
The beauty and value of the futures market is that every contract eventually reverts to the cash market. When a contract expires, it is either deliverable in the commodity or settled on a cash basis. The cash and the futures markets become one!
If you chart the cash price of a specific commodity at a given location and its futures price, particularly in the nearby delivery month, you'll find these two prices usually move together. One does not mirror the other, but the patterns are usually similar. Keep in mind that the cash price quote comes from a delivery point such as a grain terminal. This geographical point has specific local influences that explain minor discrepancies that distinguish the cash and futures markets.
Also, the futures price is just that—a price for the commodity at some chronological point in the future. News, crop reports, cycles, seasonals, and all the other influencers of price usually affect the futures price first and with more impact than in the cash market. Then the price influencers trickle down into the cash market. It is common to see a 2- or 3-week differential in the trend changes between the futures and the cash markets. Eventually, they become one price at the expiration of the futures contract. This keeps the market honest and true to the supply-demand situation.
This is the reason users and producers closely follow the futures market even if they don't trade it. They know that what happens in the pits will eventually be felt in the fields, or the mines, or the bank vaults.
Additionally, the inventory manager can be a hedger, shifting the risk of futures' usage to a speculator. This would be another reason to closely follow the futures markets.
Once you accept this close relationship, you gain insight into how to anticipate price activity by viewing the markets through the eyes of the inventory manager. Now, look at some specific price-trend moves and decide what action an inventory manager would take.
