The Line in the Sand November 16, 2009
Please click on the spreadsheet to view
Energies Crude appears to be rolling over headed for lower territory, nevertheless we suggest looking at outside markets for guidance. If the dollar continues south and the equity market can hold its own we may not see much of a setback. We have a target of $76 and then $74 on the January contract before we will explore longs for clients. RBOB and heating oil should too find their way to lower ground. The one variable could be what type of weather we encounter in the coming weeks. We’ve been buying natural gas now for 2 weeks for clients and currently they are down on their positions. This week will tell to see if prices can hold the recent lows and start trending higher. We’ve suggested 50 & 75 cent call spreads in January and also to start scaling into mini-futures with stops below the September lows on a closing basis.
Livestock Could the cattle market be readying for a shift in direction? We think so, we’ve been accumulating longs via futures and options and we’ve also instructed clients to lift their put protection. At this moment we are accumulating February 90 cent calls in live cattle and also scaling into long futures with the expectation that prices in the coming weeks to months will find their way back to 88 cents plus. The chart in feeder cattle is ugly as prices have fallen off a cliff losing 5% last week alone. We have no suggestions at this juncture but expect a bottom soon. February lean hogs closed below the 20 day moving average for the first time since 10/5 last week. We anticipate a grind lower with support at 60.00 and then 58.40. We have no long or short exposure for clients at this time.
Financials
Stocks: Once again it looks like equities are running out of gas but this could just be a pause, who knows? We have doubted the rally for weeks now and have been amazed of the resiliency in the equity market. As we’ve hinted at in recent weeks we have a bearish bias but at the moment have no exposure with clients. I have a sneaking suspicion that if we fail to make new highs this week we could get at least a mild setback. On that we could see the Dow trade back to 9500 and the S&P to 1025 by month’s end. The sentiment remains bullish and the momentum is certainly up so that is why we have yet to commit capital.
Bonds: Though we feel the Fed is speaking out of the side of their mouths, the recent chatter that rates will stay at these levels for quite sometime has Treasuries moving higher and yields coming off. As a trader whether I agree or not, which I DO NOT, is immaterial and I must gauge my decisions on market sentiment not my opinion. If this continues the NOB spread clients are positioned in should turn out to be a great trade; clients are positioned long 30-yr bonds and short 10-yr notes. Not to contradict the aforementioned position but we will continue to play the short end of the curve for clients buying long dated puts and short Euro-dollar futures as prices appear to be overbought. Even without a change in rates if the sentiment shifts in the coming weeks prices should crumble.
Currencies It seems every week we find ourselves defending the dollar, so here goes. A base looks to be forming and we anticipate a moderate rally, that being said we are putting some client’s money in play to capitalize. The 2 currencies that we think make sense to be short, all things considered on a dollar rally, is the Euro-currency and the British Pound. We will be taking a serious look at selling the Euro and Pound on rallies. Last week we attempted a trade in the Euro and took a slight loss. Clients are positioned short the Pound; short futures against a sale of an at the money put to smooth the ride. Events on the calendar this week that could cause volatility include CPI, PPI and the BOJ which is expected to hold rates at 0.10%.
Grains The USDA is behind us and now the markets will focus on weather and progress or lack there of during harvest. We continue to believe the less than ideal weather; first wet and than cold will have a bigger impact than the USDA indicated last week. We’ve had some success of late picking up corn contracts for clients on setbacks and we will continue to use a buy dips mentality. For those who have yet to read our latest report on corn and soybeans we suggest taking a look:
http://commodityblog.mbwealth.com/2009/11/13/exploiting-harvest-delays/
At the moment our featured trades in Agriculture for clients are long March 10 corn and a KCBOT/CBOT wheat spread looking for KCBOT wheat to gain on CBOT wheat.
Softs Reading an article in Barron’s over the weekend there are some calling for $4,000 in cocoa early next year? Maybe I’m missing something but in my opinion as prices retreat off their recent 30 years highs we think prices could continue lower. Coffee is getting close to a level that we will explore longs though we want to see how prices respond to the 100 day moving average. Clients still hold January OJ puts at a loss but are hopeful of a further depreciation. Prices are currently about 10% above longer term moving averages which we feel is out of line. Sugar has been sideways of late but we feel those with a longer time horizon can continue to gain long exposure at these levels.
Metals I think the adage is if the local butcher or barber givers you investment advise it is probably too late as you’ve missed that opportunity. With everyone piling into gold I feel as if we are due for a major capitulation. Am I capable of calling a top… absolutely not, but we caution those getting in of late and those with too much exposure. I do think we have a great deal more on the upside and see $1300 plus in 2010 but a correction first. We recently advised a small gamble betting on a correction by buying clients December $1075 gold puts for $300. If we are wrong they will take a small loss. Most who took the trade also have bullish silver positions on so on a further appreciation they still could benefit. Silver is our favorite longer term bullish commodity play but in the immediate future I have not a clue. On a move through $18 we suggest adding to longs and for those waiting for a correction we see support in December at $16.70 followed $16 though a violent move to $15 is not unattainable.
Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.
Tags: cocoa, coffee, commodities, commodity, corn, cotton, crude oil, currencies, energies, euro-dollar, futures, gold, grains, inflation, japanese yen, lean hogs, live cattle, livestock, Loonie, matthew bradbard, MB Wealth, metals, natural gas, options, spread trading, sugar, trading, treasuries, us dollar, wheat
