D-Day Weather Forecast and commodity markets.
What does the weather forecast for D-Day have in common with commodity markets ?
Over the weekend I watched the movie ‘Pressure’. The film focuses on the meteorologists that were responsible for the decision over whether or not to launch the D-Day landings on the beaches of Normandy in World War 2.
Aside from being an excellent movie, one particular scene made me immediately think about commodity prices.
Two highly respected meteorologists were having a debate about how to approach the forecast. One relied heavily on historical weather patterns, assuming the repeating conditions would lead to repeating outcomes.
The other was relying on the latest on-the ground weather updates from around the globe, updating his view as new information arrived.
Despite having access to much of the same information, the two meteorologists reached completely different conclusions for the forecast.
Neither one was using bad data, they just believed that different sources deserved different weight.
Sound familiar? For me I immediately thought about the debates between technical and fundamental analysts.
Technical analysts study historical prices and patterns - support levels, resistance, momentum, and chart patterns. The underlying belief is that markets exhibit recurring behavior and that history often rhymes.
Fundamental analysts approach the problem differently - economic data, supply and demand, inventory levels, freight, etc. They believe the price should ultimately reflect changing fundamentals, even if markets may temporarily disagree.
Just like in the film, both camps tend to dismiss the other. Some technical traders argue that all data is already included in the price. Fundamental traders may dismiss charts as little more than patterns our brains want to see to back up an existing bias.
But both sides are trying to answer the same question - what happens next?
The D-Day weather forecast was a nice reminder that forecasting has always been an exercise in probability rather than certainty. The military generals wanted definitive answers - would there be clear skies? But good meteorologists work on probabilities, using imperfect information to make the best estimates.
Commodity markets work the same way. Whether you are studying charts or inventories, you are building a probability distribution. I don’t know many traders that are ever 100% certain on a position. They may be confident but they still use excellent money management, size their positions accordingly, and manage their risk in case they are wrong.
And coming slightly full circle, meteorologist are now becoming a pivotal part of commodity trading desks globally. As weather patterns become more volatile, forecasting droughts, rainfall, hurricanes, and temperature anomalies has become a genuine source of market intelligence for everything from ags to nat gas and power, and even base metals.
