The Line in the Sand September 7, 2010
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Energies After the recent consolidation in Crude oil we feel prices will start moving north from here. We’ve had a couple false starts but after a settlement above the 20 day MA this week look for more buying to appear. We’ve been fairly consistent stating we expect a $10 trading range for the weeks to come so from here we would anticipate a trade back above $80 or about a $7 appreciation in the futures. A move as such should lift RBOB back near $2.05 and heating oil near $2.20. After a 25% correction in the month of August, are prices in natural gas finally finding buyers? We think so and have suggested scaling into long futures and purchasing November call spreads. Buying November futures and holding for 5 weeks has been a profitable trade 12 out of the last 15 years. Past performance is not indicative of future results.
Livestock What goes up must come down. Well that is our feeling on live cattle; after a 12% appreciation we’re expecting some back and fill action. NO not the end of a bull market, just a 5% correction. We’re anticipating a 50% Fibonacci retracement dragging October back near 94 and December near 96. Aggressive clients could probe shorts in December, though depending on stop placement you may have taken a small loss last week when a fresh high was obtained. October feeder cattle are trading below the 20 day MA having lost 2.5% in recent weeks. We expect there to be a touch more downside but at the moment have no client exposure. Lean hogs remain range bound back and forth between 74 and 79 cents. Those interested could continue to trade the range buying near 74 and selling near 79.
Financials
Stocks: We were questioned why we exited client’s shorts and last week may give an indication why. We anticipated a rally being the sentiment got too bearish and the market delivered. The Dow is up over 500 points off its low and the S&P has been able to regain the 1100 level appreciating just over 6%. We’ve yet to get short with clients but on a move of 2-3%, lifting prices back over 10,600 and 1125 respectively, shorts will be back on our radar. We likely will have multiple suggestions in futures and options in the ES so stay tuned. It could be the Wild West this week with a shortened week due to the Labor Day holidays and slack volumes with the Jewish holidays so expect volatility.
Bonds: If our assessment is correct in stocks this move should suck money out of safe havens i.e. Treasuries and back into the stock market. Is the Treasury complex a bubble; in our opinion not exactly but we do feel a move to 127’00 in 30-yr bonds and 121’16 in 10-yr notes is in the cards. We’ve positioned a good portion of our clients in shorts in 30-yr bonds or 10-yr notes via options or have suggested NOB spreads; all in the month of December.
Currencies The BOJ and RBA left rates unchanged at 0.10% and 4.5% respectively. As for what’s to come, the BoE is expected to leave rates at 0.5% and the BoC is expected to raise rates 0.25% to 1.0%. We suggested waiting for the dollar to pick a direction and based on last week’s action the direction is still unclear as prices are approaching the 200 day MA once again; in September at 81.90. We would expect the 20 day MA to act as a ceiling and remain neutral until prices trade above 82.75. The Euro briefly traded back over the 20 day MA, which should act as a pivot point. Aggressive traders could be long with tight stops looking for 1.3100. The Cable could go either way in my opinion and I have no trade suggestions. The 15% appreciation in the Swissie in the last four months is likely in the 8th or 9th inning but we’ve yet to reposition clients short as the wounds are still fresh from the loss they took on September put options. The commodity currencies; Kiwi, Aussie and Loonie are likely headed for higher ground. Our only suggested exposure with clients is the Loonie as a trade back near .9800 is expected this week or next. If not already long, we would suggest scaling into longs as long as .9450 supports in the September contract. The Yen has reached a point in which a correction should happen but we would need to see a settlement below the 20 day MA to be confident in gaining short exposure with clients. Looking at the charts one can see we’ve traded below this level in past weeks but we’ve yet to close below the 20 day MA…stay tuned.
Grains USDA report out this Friday 9/10 Corn is 35% off its lows in late June and trading near a two year high with prices within 7% of achieving the $5 level. Two private forecasts last week from FC Stone and Informa Economics confirmed our suspicions that the USDA is too optimistic in their yields. We continue to suggest bullish exposure via futures and options thinking there is more left in the tank. The only disappointment we’ve had is that 2011 contracts are not gaining as much as the 2010 contracts. From crop development to crop size, even exports we’re not finding too much bullish news on soybeans but prices are being influenced by the bullishness in wheat and corn. We would refrain from any positions in soybeans at the moment. We are looking to re-establish bullish plays in both December KCBOT and CBOT wheat thinking the recent lows should hold and prices are moving higher from here. Depending on your risk tolerance buy December options, long futures or possibly get long futures and sell premium to smooth the ride. It is plausible that prices are going north of $8/bushel in the days to weeks to come in both KCBOT and CBOT wheat.
Softs December cocoa gained ground the last four sessions and though premature to call a bottom, cocoa prices could bounce from here. We will likely have some bullish trade ideas thinking a trade back to at least 2950 is in the cards. Sugar has been on a tear having gained for several weeks but both the daily and weekly charts are suggesting these overbought levels may serve as an interim tops. Some clients have started to lightly gain bearish exposure in March 2011 contracts. Being short this contract for the next three weeks has been profitable 13 out of the last 15 years. Past performance is not indicative of future results. Cotton is trading at a 2 year high and though there are NO signs of a top as of yet we feel prices are due for a setback. Now we could be taking our position because some clients are holding December put options and carrying a loss. A violent correction is what we’re looking for but we would only suggest light exposure as we’re bucking the trend. If November OJ was to penetrate $1.32 expect the floodgates to open and increased selling to appear. After last week’s 4% appreciation coffee is once again approaching its 13 year highs. We have No exposure but on signs of an interim top we’re interested in gaining bearish exposure for clients.
Metals Copper should continue to stair step higher as long as stocks are in the green but it would take something special in my opinion for prices to get above their April highs. Those levels are about 5% higher from the current pricing in the December contract. When stocks rollover and start their descent we would expect copper to find its way back near $3.20/3.25. The trend is up and September is historically been very kind to gold bulls but unless a new record high is made this week we would expect this year to be different as a $40-50 adjustment lower might happen. We expect a trade back to the 100 day MA before we see much higher ground; that level on the December contract is $1210. Find me a better performer in the commodity markets in recent weeks than silver, I don’t think you can! In the last two weeks silver prices have gained over $2/ounce, just over 12%. Everyday I talk to investors who think they are taking advantage of this in stocks and levered etf’s, get real. We would like to see a set back to get clients positioned in March 2011 options and December 2010 futures. The problem being once we break above $20 we may trade quickly to $21 so we may have lightened up for clients too early. Sometimes trading conservatively costs our client’s money but more often than not it keeps them out of trouble.
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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