The Line in the Sand May 10, 2010
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Energies No doubt the wind has been taken out of the bull’s sails as last week’s Crude oil was lower by almost 13% giving back gains from the prior three months. This violent move has little to nothing to do with a fundamental shift but rather de-levering or investors scaling back on their risk. On further de-levering we would expect the early February low, around $72, to be challenged this week in the June contract and depending on the market’s reaction we will decide on how to advise clients. As it stands now we are more interested in probing longs than playing from the short side. We rarely trade the distillates (heating oil and RBOB) but with the recent acquisition of another IB we inherited a number of July RBOB call spreads. With a failed exit attempt early last week these clients will now be playing defense looking for a bounce and an exit door. That being said to any traders that have bullish exposure in the distillates, we would advise using a 15-20 cent spike to exit ALL remaining longs. As for natural gas the price action here continues to have a mind of its own taking no guidance from the other energy products. Clients have been stung a few times probing longs with tight stops so as an alternative we may start buying puts or selling calls against long positions in futures…stay tuned. Our favored play remains buying call spreads in September thinking a 10-15% appreciation in prices is around the corner.
Livestock Hogs and cattle seem to be trading on their own merits with little influence from market noise in other sectors. Prices in live cattle seem toppish and with last week ending in consecutive inside days it would not surprise me to see some weakness to start this week. We maintain that dips should be bought as the 20 day MA continues to support. In June live cattle that level stands at 94.00. Clients have no exposure but are willing to examine longs on a pullback of 3-4%. August feeder cattle on both a daily and weekly chart look destined for a retracement but what will be the catalyst? We are not advising shorts, but longs should lighten up or tighten up stops in our opinion. On a breach of the 20 day MA which has been the line in the sand for all 2010 we would expect a trade back closer to 106-110. Lean hogs are having trouble getting thru the same level that served as resistance in the summer of 08’. When prices peaked in 08’ within three months prices had corrected 20%. Past performance is not indicative of future results. Clients are positioned short in June and August contracts expecting the gap from late March to be filled dragging prices closer to the trend line about five cents lower.
Financials
Stocks: I think it is safe to say the correction we’ve been forecasting for several weeks is upon us. As we’ve voiced numerous times we are not smart enough to know the catalyst but we were expecting a 10-15% correction and with last week’s action we are confident that it has begun. Ideally followers listened to our advice to lighten up on longs, institute stops or to hedge off some of their risk with short futures or options exposure. Just off last Monday’s open we have seen the indices come off by 6.5% in the S&P, 5.8% in the Dow and 7.7% in the NASDAQ. The movement last Thursday was peculiar and we may never know the true cause but the magnitude of the move is being compared to the movement in the 87’stock market crash. Indices remain on pins and needles and we do not expect sellers to be done. This week will kick off with a nasty short squeeze on the news out of Europe but we will be looking to fade this rally. If you have failed to institute some sort of risk management, shame on you, but in our opinion it is not too late. We would still advise taking profits where they exist and moving forward we will be selling rallies with our clients. Our favored play here is trading the mini S&P via futures and options depending on our clients’ risk tolerance.
Bonds: As long as equities move down Treasuries should continue to track higher as the flow of money appears to be out of securities and commodities into the US dollar and Treasuries. We view this to be temporary but as we’ve said to clients the higher 30-yr bonds and 10-yr notes trade the better short opportunity. The ten handle and six handle move respectively in 30-yr bonds and 10-yr notes in the last month is unsustainable in our opinion. It’s too bad we did not have clients positioned long as this move was fairly predictable…that is our fault. We will do our best not to miss the short side as we feel it could be just as a sweet ride. Aggressive traders could start to scale into short exposure vie purchasing puts, short futures (with stops) and NOB spreads (short 30-yr bonds/long 10-yr notes). We will have more specifics in our blogs this week but once a top is formed we think virtually all of the last month price action will be reversed so stay tuned. Those willing to play the short end of the curve via Euro-dollars could have a small short futures position with stops above the recent highs. We maintain that by year’s end the Fed’s hand will be forced and they should start raising rates and we view this as the best way to capitalize for speculators.
Currencies Flight to quality sums up the currency action last week and should set the tone this week. I’m not sure where I heard this and am not taking credit, but I do feel this statement summarizes what to expect in forex in the immediate future, “The dollar is the best house in the worst neighborhood.” The dollar’s strength has been relentless and has surprised me as I did not anticipate a trade over 84 cents. I guess I did not foresee how bad the sovereign debt situation was in Europe nor did I foresee that the Euro could be no longer which in my opinion is a real possibility. This dollar strength in my opinion will be short lived but may not be done just yet. Monitor action here very closely as it affects all currencies and most commodities. The Euro has fallen off a cliff having lost 4.5% last week and over 12% ytd. If we can reach some type of resolution in Europe we could get a violent bounce and if not 1.20 will be seen very shortly…welcome to Vegas, we have no interest at this moment. The British Pound we feel is a sell rallies market but prices could bounce to 1.5300 quickly so stand aside for now. The correction we’d been calling in the commodity currencies has taken place and if we can see a consolidation we will now be looking at long opportunities in the Aussie, Kiwi and Loonie for clients in the coming weeks. The Swissie will continue to track the Euro but just eyeing the charts we think we could get a bounce back to the 20 day MA at .9280 in June. We will not take the trade with clients until we have a clearer picture on the Euro. Clients still hold exposure in September puts in the Loonie and will be advised to exit on a trade closer to .9300 whenever that happens. We may choose to trade the Yen from both sides depending on the movement in indices as we feel we could get large inverse swings.
Grains USDA report out Tuesday 5/11 Corn remains our largest speculative position with clients as they own July and September calls and December futures. Some of our clients will remain spread off long December and short July into the USDA report. We do not know what to expect but maintain that corn should be bought on dips and in the next 30-60 days we imagine prices to make their way to $4.50. Even in the face off of weakness in outside markets and a record planting pace, corn prices have held their own and we view that as extremely bullish. Furthermore, China has been buying US corn and the funds still hold a sizeable short position. As for wheat we have no directional plays but after the report if prices remain around these levels and there are no surprises, we most likely will be looking to get clients short. For now their only exposure is a December spread; long KCBOT and short CBOT expecting KCBOT to trade at a premium. In the last two weeks July soybeans have come down 4.5% and July soy meal has lost just over 6% so ideally subscribers listened to our advice as we anticipated this. If we see prices come down slightly more we are prepared to start issuing bullish trade recommendation to clients. The duration of the long trade will depend largely on Tuesdays USDA report, exports, and the weather as seasonally the end of May soybean prices typically reach a climax and move south as the crop growing season is well underway. Past performance is not indicative of future results.
Softs Cocoa ended last week with a decline of nearly 6% as prices came within spitting distance of the 61.8% Fibonacci retracement level. Short term we expect more downside but a trade under 3000 in July and we would be interested in monitoring longs, so stay tuned and expect a recommendation this or next week. A seasonal low is generally made in June though past performance is not indicative of futures results. Three months ago sugar was at a 29 year high and last week prices traded at 13 cents, a level not seen since April 09’. Both daily and weekly charts are overbought and we think prices are cheap enough to start shopping longs. Clients were advised to start buying October 10’ and March 11’ calls and we may start scaling into futures if we bounce this week. Assuming last week’s low serves as an interim low a 38.2% Fibonacci retracement would lift prices back over 18 cents. Off the highs two weeks ago, July cotton has come off 7.25% but we feel there is more downside to come. We will be selling rallies and have already started to buy puts for clients anticipating a trade closer to 75/77 cents in July. We are interested in gaining long exposure in both OJ and coffee for clients but from lower levels in both; closer to $1.20 in OJ and $1.25 in coffee.
Metals There is nothing worse in my opinion then being right on the direction in the market and still not making money. July copper prices have come off approximately 15% in the last month just as I anticipated and though anyone trading futures should have cleaned up those holding options are most likely as frustrated as I am. Granted I got clients in about 1-2 weeks early but this will be the last time I ever trade copper options as they do not move! If prices make a new low below $3 clients should be able to turn a profit but that is not too comforting seeing the underlying futures price would have moved 70 cents lower in about 5-6 weeks. We see support at $3 and resistance at $3.25. Gold is above $1200/ounce and most likely on its way to $1300…1400…1500…With the divergence in price action in gold relative to other metals and commodities we chose to have exposure in silver instead of gold with clients. Though we think it is acceptable to be in gold we see no reason to be in both metals with clients. The first significant support we see in June gold is at $1165 so if long be willing to weather a considerable pullback. July silver was virtually unchanged last week but the average daily trading range was 73 cents or $3,650 on the standard 5000 ounce contract so if volatility is not your thing look elsewhere. As long as the 100 day MA supports prices at $17.30 in July we will advise clients to remain long. Last Friday clients were buyers of $2 call spreads in September as we believe prices should make their way north of $20/ounce on this leg.
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: bradbard, cocoa, coffee, commodities, commodity, corn, cotton, crude oil, currencies, dollar, energies, euro, euro-dollar, forex, futures, gold, grains, lean hogs, live cattle, livestock, matthew bradbard, MB Wealth, natural gas, oil, options, RBOB, silver, soybeans, spread trading, us dollar, USDA, wheat
