The Line in the Sand November 2, 2009
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Energies Crude oil has traded lower 4 out of the last 6 sessions and appears to be grinding lower with prices now almost $5 off their highs. We’ve suggested buying put exposure for clients as we’re anticipating a trade down to $75.70, and then $73.80 in the December contract. The move lower should be aided by weakness in the equity market and continued dollar strength. If our assessment is correct we would expect the distillates to follow Crude’s lead, as of last week we called for a 20 cent move lower in heating oil and a 15 cent reduction in RBOB. Last week on the December contract heating oil lost 9 cents, and RBOB gave up just over 8 cents. In the last 2 weeks December natural gas has lost 15% in value and prices this week traded below our $5 objective. We’ve started pricing out bullish plays but have yet to commit funds. We’re thinking January call spreads and perhaps a long entry in mini-futures…stay tuned.
Livestock We’ve got the correction we called for in live cattle and have started getting clients positioned long in the February contract. For now we have 2 suggestions; getting long futures with option protection or buying the 90 calls. Last week Friday we started buying for clients that trade futures as for the second trade we missed our limit and will try to work an order this week. Support is seen between 85/86 in February. What is peculiar in cattle is that the cash market is trading at a premium to the futures which should not be the case for any extended period. One of two scenarios, the futures are too cheap or the cash is too high, you make the call. As for feeder cattle we have no suggestions at this point. Those who tried to short lean hogs should have been stopped out at a small loss. Prices have advanced to new highs trading 20% off their lows in the month of October. China is coming back on line as a buyer which could carry prices even higher. Being charts are overbought we would stand aside for now looking to buy form lower levels.
Financials
Stocks: After months of illogical moves higher the equity markets traded lower through the 50 day moving averages as we’ve been calling for in recent weeks. This move lower could gather steam and at this point we’re content holding shorts for clients at a profit looking for a bit more. The weakness last week erased all of the gains for the month of October, much of that coming last Friday with the Dow losing 2.4% and the S&P down by 2.7%. The volatility is also picking up as the Dow has moved triple digits 6 out of the last 7 sessions. There is no shortage of market moving events on this week’s calendar; RBA, FOMC, ECB, BoE, G-20, and NFP#. How is that for a list of acronyms? This week we expect persistent volatility maintaining our pessimistic bias. Next targets are 1010 in the S&P and 9400 in the Dow. We will attempt to exit the December ES puts for clients at 30 points or better on a new low.
Bonds: If money exits commodities and equities it should continue to find its way to the dollar and Treasuries. In 10-yr notes the price ended last week above the 40 day moving average and the 30-yr halted at that level which should be resistance to start the week. We still like the NOB spread trade recommendation but have taken most clients out of the trade at a very slight profit being many of their open positions are too correlated and we are trying to manage the money. Those not carrying all the open positions in equities, energies and currencies stay the course as we expect the spread to widen and bonds to gain on notes. Euro-dollars traded to new contract highs last week, sell into this strength. Clients are advised to scale into short futures and to buy long dated puts, last week we bought June 10’ 99.00 puts for $625. No change expected by the Fed this week on rates but the word “extended “ or lack there of will be key. If the FOMC at least signals its intent to raise rates in 2010’ expect some fireworks. Much like the GDP number we do not trust the reported NFP # but it could be a market mover so do not ignore.
Currencies Currency movement this week boils down to the US dollar. 5 out of the last 6 session’s prices traded higher by almost 2%. The US dollar index is above the 20 day moving average and the majority of investors are positioned short so we could get a nasty short squeeze. We’re not expecting a substantial appreciation but a trade up to 78.00 in not out of the question. As for the Loonie we navigated the short side 3 times in the last 2 weeks for clients but at this point the easy money has been made and our objectives met. Clients remain short the Euro-currency thinking there is more downside and they are long the Yen positioned in December 110/113 call spreads expecting as trade up above 112. A number of central banks meet this week expect unpredictable moves.
Grains Mother Nature and her effect on harvest remain on the front burner but we are only a week away from the next USDA report. Latest reports projected the US corn crop to be 13.018 billion bushels and the soybean crop at 3.25 billion bushels. With the slowest harvest pace in almost 25 years is that still the case? Just 20% of the corn crop has been harvested in the major corn producing states compared to 55/60% in recent years and for soybeans 44% vs. 85/90%. We will be looking to be a buyer of March wheat and January soybeans for clients but have yet to commit funds. Furthermore as a spread we like buying KCBOT and selling CBOT wheat from a touch lower level on the spread. We’ve been working limits for clients but have yet to be filled. Corn to us is a buy all things considered. We’ve advised clients to start buying March calls. For more aggressive traders we’re buying futures in March against a sale of March calls and purchase of December puts. Contact us for a further explanation. Getting long corn last week and holding until mid-May has worked for the last 10 years and 34 out of the last 40 years. Past performance is not indicative of future results.
Softs Cocoa has started to rollover but we need an immediate 10% collapse to make good on clients December puts as expiration is around the corner. For new entries look for short opportunities. Clients remain short January orange juice expecting prices to make their way back near $1. We would rather be short cotton and coffee than long but at this time have no client exposure. Lumber has started to show signs off life and may well be a buy dips market but we will wait for further evidence. Longer term we like being long sugar but still feel a trade back to 21.00 is in the cards. On that we suggest long exposure via futures and options in March contracts.
Metals The gold and silver markets have been acting manic of late. Day to day the risk aversion trade is turned on and off so day traders have been jumping in and out. I’m a lousy day trader and would prefer to buy a buyer from lower levels on a position trade. The trend line in gold held last week dating back to the August lows. If this week this level gives way, a trade down to 1015 and possible 990 could happen in the December contract. On this we suggest buying call spreads in April. We like buying $100 or $200 spreads depending on your circumstances and on you overall outlook. We expect to see prices trade up to $1200 in Q1 or Q2 next year so we will be positioning clients accordingly. On silver some clients remain short and if we break $16 this week they will exit and reverse. Others are on the sidelines waiting to pounce on longs abruptly. We suggest entering long March futures on a trade near $15.50. We’ve also been accumulating funds to buy March and/or May call spreads for clients. We like the idea of $3 call spreads paying $2500-3000 per.
Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.
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