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The
Weekend Commodities Review
By Head Analyst
James Mound
For the Week Ending
January 27th,
2008
Energies
After retracing 15% from the highs crude oil has bounced
on support seen from a stock recovery following Monday & Tuesday’s
collapse. The market has abandoned inventory
numbers and geopolitical issues for pure inflation hysteria. If the stock market sells off then crude
oil weakens on fears of inflation pressure.
If stocks rally then crude runs with it because of the implied relief
inflation fears. Now if that isn’t the
dumbest thing I have heard in a while I don’t know what is! Yet this is the current psychology in the
market. Luckily for traders this will
not last and is a brief blip on the screen of a market that is likely to have
seen $100 for the first and last time this year. Expect to see strong fallout in heating oil
so look to play against the seasonals and get short
heating oil and long rbob gas (1 to 1). Natural gas is testing a critical area with
a developing head and shoulders and topside resistance near 8.50. A break above makes this market worthy of
some call buying, while a break below 7.00 sets up a market failure.
Financials
The financial sector has been on one wild rollercoaster
ride the past few weeks and this week it went right off the tracks. Lacking a backbone and tolerance for a
failing stock market, the Fed made an emergency rate cut and in doing so, did
an excellent job of putting off the inevitable. This creates a false support in a market
that is in desperate need of a washout of overzealous bulls and stock pundits
preaching buy and hold through the carnage.
The VIX is through the roof and offering irresistible premiums despite
an upcoming two day Fed meeting, GDP and employment reports and a State of
the Union address that should do little to shake this volatility.
Bonds spiked to incredible contract highs and set a nice
spike high top, offering sellers a great entry point to a short play down to
118. What can we expect from this FOMC
meeting? While this is clearly the
widest gap in analyst forecasts for a Fed meeting seen in years – ranging
from no change to predictions of a ¾ point cut – there is little likelihood
of either extreme being realized. The Fed is stuck because you can’t have an
emergency cut and then say there is no need for further cutting, which is not
even close to the Fed speak we have been hearing of late. Furthermore you can’t cut ¾ and then
explain why you need another ¾ cut a week later. Look for a ¼ on the safe side and a ½ on
the aggressive side. A ¼ point breaks
the stock market back down and a half may do the same but it may just take a
bit longer to sink in.
The dollar is confused as it waivers between the Fed’s
aggressive stance opposing the E.U. and Bank of England’s denial of the
future global recession. Is the Fed
right to try to get ahead of the curve (better late than never) or is the
E.U. right not to panic? When the
market realizes they are both too late then the dollar wins out and the euro
takes a much needed fall, taking the Yuan and every major foreign currency
with it as it deflates a currency that is in desperate need of relief. The downside, aside from the obvious, is
that a rebound in the dollar kills foreign investment even though it
stabilizes inflation, while giving away money at just above zero interest
sparks inflation anyway. We would be
in a lose-lose situation but it is still the likely
scenario as the recession plays out and the Fed tries to juggle too many
balls with a broken hand.
Grains
Could it be that lock limit down in the grains gets
erased as a blip on the screen and the market sets fresh highs amid fears of
future plantings and negligible inventories?
Despite some of South
America getting rain to help a
dry bean and corn crop there is a forecast for a spike in temperatures in the
not so wet Argentina growing area.
Spiking demand and supply shortages have helped to
diverge wheat from more technically bearish soybeans and corn. While my bias is for a grain collapse
through the end of March it is quite possible that the bears are getting
suckered in here. Take on some
straight put plays and leave some powder dry in case the market wants to take
a stab at the highs.
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Meats
Cattle continues to go nowhere fast, building some reasonable
consolidation and setting up a possible breakdown on a close below 89. Sell into a 3 point bounce that will likely
sucker in the bulls this week. Indonesia and Barbados gave relief on U.S. beef exports while the U.S. is rumored to be opening up the pork trade to Brazil. Hogs are holding
a steady support and recovering from a heavy beat down that saw this market
plummet more than 30% in under 3 months. Buy the dips here and look for a run to 65.
Metals
Gold continued to surge after shrugging off a massive
decline from the stock market meltdown earlier in the week. This is a market riding high after breaking
out of a several month pennant, but is now overbought and due for a quick
pullback. Gold is up over 40% since
August – the second largest 6 month percentage move and largest point move in
over 25 years! When this falls it will
be hard and fast and put option premiums will skyrocket. Buy puts with some on them and wait for
collapse. Silver is right behind it
will just as much merit in buying puts.
The euro collapse and crude oil retracement
will end this metals run sooner rather than later. Part of the surge is on news of African
mining companies having to shut down their mines due to power outages. This is the bread and butter of South Africa, the world’s largest producer of platinum and serious
player in the gold market. The problem
is short term and coming at just the right time – the timing is almost too
good if you know what I mean. Play the
option game and don’t get suckered into the wrong side of this volatility.
Softs
Coffee has struggled after setting fresh near term highs
and is getting some bad PR lately as Brazil’s agricultural officials are revising their forecasts
higher. Don’t believe it! A late flowering in Brazil due to drought conditions has been widely dismissed as a
non-event, but it will likely surprise many when it hurts the crop yield come
harvest. Ethiopia, Africa’s largest producing country, had a 64% drop in exports
(1 month period ending Dec. 9th) and did not provide an
explanation or a forecast on future declines.
Vietnam’s crop is ugly and Kenya’s crop is almost non-existant. Jump long with some bull call spreads.
OJ bounced after testing a triple bottom support near 132
and looks to be on the rise. This
market is capable of some serious volatility so look at some straight call
plays for May to play a spike.
Sugar reeled back after a strong rally spurred on by a
massive short covering of a failed Brazilian futures trader. After testing support near 1130 the market
surged once again on Friday. Is the
short covering not over? Perhaps the
rally could be attributed to news that India’s crop forecast has been lowered by million tones due to
poor crop yields. Either way this
market is worth a hard look for a call play or some long strangles.
Cotton is on a volatile ride, balancing weather, crop
report reaction and spec trading. The
market was lock limit down back on January 10th and then tested it
again on Wednesday with another lock limit down move. This is so unusual I have not been able to
find another instance of that occurring in any U.S. market in the last 20 years! I am not sure if that makes it bullish or
if it just sets up a volatile collapse.
Strangles are the way to go here – the longer
term the better.
Cocoa is about to break to fresh contract highs, riding
bullish fundamentals and strong trend line support. 2500 here we come!
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