The Line in the Sand March 22, 2010
Please click on spreadsheet to view and adjust magnification on your viewer
Energies Neither bulls or bears have been able to gain much traction as prices of oil have wandered in a $5 range for the better part of one month. We’ve yet to get the break in prices forecasted but we are still positioning clients to take advantage of a trade lower. Until prices break out of the range, clients have been advised to sell near $83 and buy near $78. As April options have expired and May is becoming the lead futures month we may see a trade down to the 200 day MA at $77.25 in May. Until we do get a break in prices we would refrain from trading the distillates as we feel they could get hit 15-20 cents relatively quickly. Prices in RBOB ended 6 cents off their highs last week and heating oil closed almost 7 cents off its highs so a correction may already be underway. Natural gas fell for the sixth consecutive week but after failing to break $4 could an end to the selling be in sight? The previous 2 occasions when prices were this oversold within a month’s time, prices were able to rally 24%, most recently from mid-November and before that in early September. Past performance is not indicative of future results. For one moment lets assume prices bottom close to $4, a similar move would carry prices back near $5 by May. We are advising clients to lightly scale into May futures and have also been buying June call spreads.
Livestock Friday’s Cattle of Feed report was viewed neutral but with the report at our backs will traders book profits on longs, as feeder cattle and live cattle have traded to new contract highs and levels not seen since the fall of 2008? Looking at a candlestick chart of June live cattle, Friday formed a doji star and prices closed below Thursday’s settlement so a cautionary flag is thrown up for bulls. While in May feeder cattle prices were marginally higher on the day but did close well off their intra-day highs. If we can get some downside follow through to start this week in live cattle a trade down to the 20 day moving average would likely follow. We could see a 4 cent correction dragging May back near 91.00 without doing any chart damage as that is where the trend line comes in from the December lows. On signs of a reversal we may opt to get clients short June or long June against a short in April…stay tuned. Lean hogs have been able to trade higher on rumors of countries lining back up to buy pork from the US but until we see more solid evidence we will treat these as just rumors. We have no exposure with clients currently but have a bearish bias. To see more significant losses as we’ve indicated we would need to see a penetration of the 20 day MA; in April at 72.00.
Financials
Stocks: The bulls are still in control, but we are seeing topping action in a number of indices that could signal that the party is in its 11th hour. The Russell 2000 closed down 2 consecutive days for the first time since late January, the NASDAQ made a new high and failed, the S&P formed a bearish engulfing candle Friday, and the list goes on. Perhaps one of the biggest red flags is that total assets in money-market funds have fallen bellow $3 trillion for the first time since 2007. What happened in 2007? All major US indices peaked and at today’s prices we are off 25% in the Dow and 27% in the S&P for just 2 examples. All we think it would take is for 1 shoe to drop to see the herd run for the exit door; that could be more sovereign debt issues, the health care bill, further moves in interest/discount rates here or abroad or Q1 profit taking. We are not here to figure what could be the catalyst but rather manage money and more importantly risk and at these lofty levels we feel there is a high likelihood of a correction. We have been thinking this now for 3-4 weeks and as we’ve traded to higher levels there is no denying our timing has been off but this is the type of situation I would rather be early than ignore all together. We’ve again advised clients to get short futures with stops above the recent highs and still feel a small position in June S&P and ES puts is merited.
Bonds: The Fed did nothing on rates as expected but they too left the language as is, which is a little disturbing as we do not understand what an extended period means? As stated in an article in Barron’s over the weekend “sometime between a month and eternity.” What the Fed did do is confirm their intention to stop buying mortgage backed securities and to shut down their TALF program in the months to come. As for the Treasury complex both 30-yr bonds and 10-yr notes quietly made their way to higher ground but not high enough for our clients to have an interest in selling. As we’ve said in recent posts we would be willing to explore shorts in 30-yr bonds closer to 120’00 and in 10-yr notes above 118’00. The Euro-dollar continues to be a sell rallies market but what mistake we will not make again with clients is to hold onto shorts without protection so for new entries when filled on your short futures put in stop loss orders above the recent highs. We suggest trading out until at least March 2011. We still see value in buying long dated puts with a portion of ones commodity account as well; you can buy at the money puts with 1 year on them for under $1000/per.
Currencies Though there was no change in interest rates in the US or Japan last week a surprise came from India which raised its borrowing and lending rates. This served as a shot across the bow being this could be viewed as an early warning that the central banks in India and/or China could make a move in the weeks/months to come on interest rates. The US dollar is back above the up sloping trend line after Thursday and Friday’s action lifted prices almost 1 full penny. With prices ending the week back above the 20 day moving average it looks like we should see a challenge of the recent highs around 81.50. That being said we should see pressure on the other Int’l currencies; with the most weakness expected in the Pound, Euro and Swissie. We continue to think that we could see pressure on the commodity currencies but as opposed to selling the Aussie or Kiwi we prefer the sidelines and to be a buyer from lower levels. Our pick to have short exposure remains the Loonie as we think weakness in the metals and energies could drag prices in the Loonie back under .9500 cents. Aggressive traders could short June futures with stops above the recent highs or less risk averse traders could buy June put options. As of Friday’s close the settlement on the 96 strike was $820 and the 95 strike $580. We are still looking for a higher trade to be a seller on Yen for clients but prices have been unable to trade above the 20 day MA for the past 2 weeks. On a close below 1.10 we may opt for a bearish option trade so stay tuned.
Grains One of the reasons I like trading agriculture so much is the media does not talk about these markets like they do about metals and energies so investors are not so easily influenced and are forced to do more of their own investigating in order to make informed investment decisions. If so they should come to the same conclusion I have that demand is growing and prices over the long run should be sloping up. So when prices are depressed a trader with a longer time horizon should use this as a buying opportunity. This in combination with less than ideal weather and expected planting delays tells me that corn is a buy and if soybean prices can come off slightly, they too should be purchased ahead of the USDA’s Planting Intention report which is just over 2 weeks away. Clients are positioned in July options as well as December futures in corn operating under the influence that between now and then prices will be 50-70 cents higher. When asked what strike prices I‘m buying, it depends on the clients account size and risk tolerance so if you feel you want a more exact explanation do not hesitate to contact us. We like being long July soy meal via futures or options. As for soybeans we would be willing to be a buyer of November futures between $8.80-8.90. Though we feel wheat prices are cheap, the fundamental picture (i.e. massive crop), we cannot find a compelling reason to be long and think wheat has limited upside unless we have a major weather disturbance or it is dragged higher by other Agriculture products so we have no interest at this time.
Softs Cocoa prices continue to look for guidance from the dollar and Pound so until we get a clearer picture there we would remain on the sidelines. We should not miss anything as prices have been in a $250 range for the past 3 weeks. May sugar touched a 20 month low last week as prices have come off 40% in recent weeks. Re-establishing longs should be on your radar though we think it would be wise to wait for confirmation of an interim bottom. We see no reason to rush back into this market as the pace of a move up, if we get a rebound, shouldn’t be anything like the recent sell off. At this point we expect a trade back to 22-24 cents but it could take several weeks so be patient. We are still anticipating a lower trade in cotton as long as we stay below 84.00 cents on a closing basis in May. Our downside target remains 76/77 cents. May OJ came off 4% last week but we would wait for lower levels before shopping longs for clients. We think another 10-20 cents could come relatively easily.
Metals The CFTC will be examining futures and options trade on precious and base metals Thursday Copper continues to tread water between $3.30-3.40. As we’ve declared we think it is just a matter of time before prices find their way back under $3/lb we’ve yet to see the selling like we anticipated. Both the fundamental story and technical picture support a break lower so at this point we will remain short with clients and sit on our hands waiting for the trade to develop. Clients have bought deep out of the money December puts expecting a major leg lower. Friday’s close to $20 loss in April gold pushed prices below major moving averages taking prices within $7 of $1100 which at the moment appears to be the line in the sand. Though clients have no exposure we would rather be a seller than a buyer based on the recent price action. We are expecting to see a trade to $1075 and potentially $1045 in the not too distant future. As for silver the dismal action late last week too dragged prices near the recent lows but the difference is prices remained just above the 20 and 50 day MA’s. On a breach of $16.90 in May silver expect $16.50 and potentially an attempt under $16/ounce. We do not suggest futures at this time or out right options but only have clients in $2 call spreads in July as the spread allows more flexibility in our opinion.
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: bears, bonds, bradbard, bulls, cocoa, coffee, commodities, commodity, corn, cotton, dollar, energies, futures, gold, grains, livestock, matthew bradbard, MB Wealth, metals, options, silver, softs, stocks
