The Line in the Sand April 12, 2010
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Energies Crude oil’s ascent has been relentless but could prices be due for a pullback? Oil has closed lower for the last 3 sessions and could make its way back to the trend line that has held since the beginning of February. On a close below the 9 day MA at $84.75 look for the 20 day MA at $82.90 to come into play. If we see a dip to those levels and prices hold we will be looking to get clients long…stay tuned. Natural gas appears to be forming a solid base as prices have been trading in a 50 cent range for the last 2 weeks. We are still advising clients to lightly scale into long futures in June contracts and to buy 50 cent call spreads in July. As for futures we would advise stops below the recent lows, so on the standard contract that is about $2,500 of risk per and on the mini just over $600 per.
Livestock The bull markets we’ve experienced in cattle and hogs in 2010 has been impressive, with June hogs 10 cents off their February lows and June live cattle having gained 8% from the first trading day of the year. The trends remain up but we are looking for ways to gain short exposure for clients in the weeks to come thinking a slow down in the economy could bring these markets lower. June lean hogs seem to be having trouble settling above 85.00 if that continues we would be looking to get short with stops above the recent highs and also monitoring put options. As of Friday’s settlement June 80 puts were $550 and the 84’s were $1120; potential ideas. Feeder cattle made a new 2010 high to end last week and we would refrain from trying to pick a top there. As for live cattle we’ve yet to make a move but we are exploring delta neutral strategies with a negative futures bias. For example shorting August futures while simultaneously buying multiple August 94 or 96 calls.
Financials
Stocks: All things considered unless we get negative earnings, stock indices should make their way through 11000 in the Dow, 1200 in the S&P and 1200 in the NASDAQ this week. Friday’s close was impressive and if we had another hour of trading those levels would’ve likely been breached last week. I cannot justify these levels and have given up trying to find a reason why a 70-80% rally could happen in this environment. I do however think that the fact that most retail investors are singing “koombya” and have started to put their money back in the equity market the curtain on this rally is about to close. My only solace is the money clients have lost trying on numerous occasions to pick a top in the S&P we feel we can get back once we turn south as we will jump on board and ride the slide 10-15% lower. Looking at the weekly chart we think the absolute top before a sell off commences is 1235/1250 in the June S&P.
Bonds: Just as important as it is to follow the price action in 30-yr bonds and 10-yr notes investors trading in this arena need to pay attention to the yields as well. We see support in June bonds at 115’00 with resistance at the 40 day MA at 116’10 and in the 10-yr support is eyed at 115’08 and resistance at 116’16. Clients have no exposure but would be open to selling from higher levels. We continue to advise short exposure in 2011 Euro-dollars with stops above the most recent highs. Though we likely will get no change in rates at the end of this month by the Fed, the market appears to be more open to an increase in the months to come.
Currencies Last Friday the US dollar index closed just above the 20 day MA which continues to act as the pivot point on this contract. We view this week’s potential currency movers as the CPI, Bernanke’s testimony before the Joint Economic Committee, Beige book, and finally chatter out of China about the Yuan. Over the weekend we got a bailout of Greece which initially should lead to dollar weakness; if the dollar continues its slide to lower ground the likely beneficiaries would be the Euro, Cable and Swissie. The Pound closed out last week above the 20 day MA but it took a gap higher open in the Euro and Swiss to penetrate that level. The 3 commodity currencies have been the standouts of late as strength in commodities and a rate increase by the RBA last week lent support. The Aussie and Kiwi could continue higher but we still think the Loonie is over due for a set back. Aggressive clients are selling into this strength with stops above the recent highs and are also buying June puts. On a rally closer to 1.0900 we will be exploring short exposure in the Yen for clients.
Grains Rumors of China importing corn had corn moving higher early last week but those gains were short lived as corn retraced to end the week virtually unchanged. Without ideal growing conditions in the coming weeks in the Mid-west, the market should start to price in planting delays and build in a weather premium in corn. We continue to advise clients to have long options exposure in July and long futures in December. The first positive sign would be a settlement above the 20 day MA which has not happened in 3 weeks; that level is $3.55’4 in May. Soybeans were one of the loan positive markets last week in the Ag sector as the 20 day MA acted as support. Prices may stay supported on concerns of planting and if the demand for both meal and oil remains strong. Though we could see some pressure on prices if the South American crop advances. For whatever reason if November trades below $9/bushel it should be on your radar as a potential long entry. Wheat prices should remain under pressure as harvest should add fresh inventories and the demand of late has not been stellar. The most recent bounces in my opinion are nothing more than short covering.
Softs With cocoa prices below key MA’s the path of least resistance should be down. If prices are able to break 2800 we could see a trade down to 2700 relatively soon thereafter, a level not seen since last summer. If July sugar is able to maintain 16 cents this week we will likely start exploring long plays in July and October sugar for clients…stay tuned. Assuming we do see prices start moving north we would have a first objective in July of 19/19.50 cents. May cotton has lost ground the last 4 sessions as prices ended last week below the 50 MA for the first time in 8 weeks. We would advise selling rallies that are contained at 80.00 in May. Those not willing to trade cotton futures we recommend purchasing July or October puts. After a 15% correction in OJ prices over the last month we’ve started getting clients lightly long. Last Friday clients were advised to buy July $1.20/1.40 1:2 call spreads. Being prices are oversold, the trend line appears to be holding and we’ve experienced a 38.2% Fibonacci retracement, we thought it made sense to start nibbling at longs. We were looking to buy a break in coffee but the move last week had so much velocity we held off thinking we may get a larger break. Depending on this week’s action we may make a move looking to have exposure for a potential weather play on the South American crop…stay tuned.
Metals Copper has made its way to levels not seen since the summer of 2008 gaining again last week. In our opinion these lofty levels are not justified. We’ve yet to gain any short futures exposure for clients but we are recommending buying December out of the money puts in case of a “black swan” event. Seasonally speaking copper tends to form a top near the end of April/beginning of May; past performance is not indicative of future results. June gold has been positive 10 out of the last 11 sessions. In the last 2 weeks prices in gold have rallied 7% on technical reasons on top of money flows into the yellow metal as a flight to quality. The trend remains up but we would advise lightening up and tightening up stops on longs as a $50 correction could come at any time from our standpoint. Use $1145 as support and $1190 as your next upside objective. May silver traded to a 13 week high just shy of $18.50/ounce last week. That was close enough to our objective that we advised clients to exit all their remaining July options at a profit of 25-30%. As we told our clients we do not think this is the end but we do feel that prices have gotten ahead of themselves. After all we’ve seen a 25% move in just 9 weeks. On a trade back closer to $17 we would again re-examine long exposure for clients.
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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