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The Next Big “Market Unwind” Explained

Steven Place  |  June 30, 2022

In the past, I’ve discussed the “tail wagging the dog” in the markets.

This is where a market is driven not by the underlying price action, but by considerable instability in a derivatives market.

We saw this with the GME options market when it went crazy.

GME Chart
GME Chart

We saw this when oil went negative in 2020.

Oil Price Chart
Oil Price Chart

And there’s the possibility of another massive unwind coming up.

Here’s the play:

Wheat futures had a massive spike higher after the two largest wheat exporters kicked off a hot war in Eastern Europe.

Since then, the price has stayed bid. 

But after the Fed hiked 75 basis points, we’ve seen a bit of an unwind:

Wheat Futures Chart
Wheat Futures Chart

But wait a second… 

The war’s not over, and food prices are still running hot. 

Who’s a seller here?

Let me give you a hint:

Wheat ETF News
Wheat ETF News

WEAT is an ETF with wheat futures exposure. It lets retail traders speculate on commodity prices without dealing with the massive leverage involved in futures.

Once the war kicked off, buyers flooded into the ETF. The ETF custodian has to create new units when this happens, and that capital then goes into the futures market… 

Which can drive the underlying asset higher.

What about an unwind?

Total Assets Under Management Chart
Total Assets Under Management Chart

There’s about a half a billion $$$ in the WEAT fund, well off its high…

But still much higher than the beginning of the year.

If retail traders start closing their WEAT positions, the custodian will have to redeem shares and sell wheat futures on the open market.

Do you think the futures market has enough liquidity to soak up that kind of massive unwind? 

I’m not sure.

Pay attention to this — if we start to see food prices unwind significantly, it can give the Fed some wiggle room in terms of policy.

Any change in signaling there could bring a lot more capital back into equities.

If that time comes, and you want to be ready for it, it may be best to scoop up choice stocks at a discount.

Let me show you one of my favorite tactics for doing so.

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Author:

Steven Place
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