For January 28th - February 1st 2008

By: Matthew Bradbard

Never a dull moment!  Brace yourself this week as there is a number of potential market movers; the FOMC meeting is where the Fed is expected to deliver another 50 basis points, non-farm payroll data, the last state of the union address by Bush, an OPEC meeting in Vienna where they will debate on what to do with the global oil spigot, and 4th Quarter GDP which will serve as the first data point to get a read on how we faired in late 07’ just to name a few. We suggest staying on top of these happenings in addition to current fundamentals and technicals to give a clearer picture of market direction. As we stated last week we believe the current bull cycle in commodities is alive and well and hope traders used last week’s pullbacks and future setbacks in commodities as buying opportunities. The major unanswered question is how will a recession domestically, or at a minimum, a significant slowdown in the US effect economic growth globally?  It used to be that if the US sneezed the global markets caught a cold but much debate exists if that is the dynamic today. After all, the US accounts for 22.5% of the world economy, according to the latest World Bank estimates, so a slowdown can not just be brushed off. 

To find out exactly how we are positioning our clients in commodity futures and options, Contact us today at 1-888-920-9997.

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As a trader if you are not comfortable with volatility then crude oil is not the market for you. Trading resumed Tuesday in oil with a wild $4 trading range after Mondays holiday. It appears for now oil has reversed coming within 5 cents of support dating back to December 6th on the March contract. We would advise being cautiously long paying close attention to action in the stock market looking for March crude to fight its way back to $94 in coming weeks.  We closed above the 9 day moving average on Friday and next resistance lies at $92.59; the 50% retracement from recent H/L.  Both stochastics and RSI support a bounce higher but we would not recommend getting married to this position as February is generally a weak month for energies.

Natural gas has been cooperative of late as we have recently called a top and a correction. Now we are looking for a bounce back, let’s see if we can go three for three.  Last week we advised a handful of our clients to get long March near $7.70 looking for a quick move back above $8, if you are not long yet look for a setback near $7.70 that holds to enter.  A larger than anticipated draw in the AGA report helped this market reverse, but with mixed weather reports ahead trail a stop and be grateful with a winning trade as we are not 100% convinced a bottom is in yet.  For larger traders there is a strong seasonal tendency for June natural gas to trade higher from late January into early March; 13 of the last 15 years.

As winter begins to wind down, the petroleum industry begins to prepare for the driving season. As driving conditions improve, gasoline consumption will rise. But even as it does so, distributors will begin to accumulate inventories in anticipation of the traditional opening of the summer driving and vacation season at the end of May. This accelerated demand usually drives gasoline prices higher from February into May.  That in combination with looking at the charts we are looking for long entries in gasoline, once a bottom is found, a 15-20 cent advance will come in a hurry.  Depending on your time frame you may want to look as far out as May or June contracts as this could become a position trade.

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Last week the USDA reported that 2007 beef production was up 1.0% from a year ago while pork production was up 4.2%.  After the close Friday, the USDA estimated last week's beef production at 495.9 million pounds, up 1.8% from a year ago. Pork production was estimated at 473.5 million pounds, up 12.8% from a year ago.  We generally do not advise clients to trade pork bellies as the open interest and liquidity are lacking but charts are supportive and the technicals are on the verge of turning bullish so we would suspect a move $3-5 higher in coming weeks.  If trading here, play from the long side and be aware of the uncertain potential movement from lack of volume.  April lean hogs closed marginally higher on the week trading up 30 ticks closing at 61.95.  Although there will be a time to get long we would look for choppy to lower trade this week.

The USDA said that, as of January 1st, there were 12.097 million head of cattle on feed, up 1% from a year ago and roughly as expected. Placements in December were down .7% and marketings were up 1.2%.  This is seen as bullish for cattle futures because of the lower than expected placement figures.  March feeder cattle traded slightly lower on the week but did hold the 9 day moving average of 101.92 closing just above at 102.20 on Friday.  We maintain that dips should be bought and the low of 99.30 made on January 17th should hold.  April live cattle remains our favorite trade within this sector for our clients as we feel prices are finding value around this level and should be accumulated.  Because of seasonal strength that we indicated in numerous commentaries and in combination with the charts supporting a move higher, we are comfortable advising customers to build a long position here looking for a move up to the contract highs in coming weeks to months.  Like feeder cattle we are expecting the low made on January 17th of 92.30 to hold.

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Stocks:   Predicting where we go from here is easier said than done.  All indexes rallied significantly off the surprise 75 point rate cut by the Fed on Tuesday morning.  Will the market react similarly off Wednesday’s expected 50 basis point cut?  On both Tuesday and Wednesday the stock market traded violently higher and lower on very heavy volumes.  The market is still nervous and it is doubtful in our opinions that lower interest rates will rescue us from a further slide.  The S&P nearly avoided sliding into a bear market being off 19% from its October peak before bouncing off the 1260 area on March futures. It doesn’t look much better for the NASDAQ which slipped lower and finished the week 18.6% below its October high.  Although the Dow finished higher on the week, the bearish engulfing candle on Friday and the fact that we were not able to close above the 9 day moving average (12,333) on March, warrants a cautionary flag.  We would recommend staying defensive and still advise traders to sell rallies and as for all investors with stock portfolios in it for the long term to implement hedging strategies.  Call to inquire how you can protect your stock portfolio with index futures and options.

Bonds:   The Federal Reserve normally tries to avoid reacting directly to financial markets, yet last week the Fed cut rates by 75 points from 4.25% to 3.5%, which is the deepest cut in the Fed’s main interest-rate target in more than two decades.  This emergency cut we feel was in large part due to recent market downturns and the impending fear of a recession. We trust the Fed has accepted that we will experience a recession but by dramatically lowering rates they hope to make the slowdown milder and shorter.  Movement in the bonds market will be based largely on the flow of money in and out of stocks.  Current prices appear to have priced in an additional 50 basis points this Wednesday, which in theory should take prices higher, but as the name signifies “futures” it may already be priced in, so depending on if there is any indication of further cuts should determine the direction of the debt market.  Our assessment is that equities should move higher, although we will not be recommending a long here, this should cause bonds and notes to ease which we will be advising to trade.  Sell rallies in March notes that are contained by 118’06.5 and in bonds that are contained by 121’14 on a closing basis.  We may also explore playing the yield curve with customers trading Euro-dollars; September 09’ over September 08’ has our attention but we have not selected an entry for customers as of yet.

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The Bank of England meets next on February 7th and many are expecting a quarter-percent rate cut. Last week the March British pound traded as low as 1.9280, and experienced the lowest close in ten months.  Sell rallies as we feel the trend is down, prices should be contained between 1.9900 and 2.0000 on March and should find their way back to 1.9300 in coming weeks.

The Bank of Canada cut rates ¼ point last week but this came as no surprise as the market had priced this in.  We expect prices for now to remain range bound between .9700 and 1.0200 and will most likely look for guidance from outside markets like energies and metals.  Play the range.

The Reserve Bank of Australia said that consumer prices were up 3.0% in the fourth quarter from a year ago. The Reserve Bank meets on February 5th and many are wondering if there will be another rate increase on inflation concerns. The March Australian dollar ended the week at .8757 in the middle of the Bollinger bands and almost three cents off the lows on Tuesday.  We will continue to advise buying the Aussie on dips but will stress how important it is to pay attention to outside markets as the Australian dollar will show considerable weakness on a commodity pullback which is possible.

We are advising clients to get short the March Swiss franc as long as a new high is not made. We are looking for prices to pullback to .8900, just above the 38.2% Fibonacci retracement and the lower Bollinger band.  Selling the Swiss franc on January 23 and buying it back on February 12 has been profitable 14 of the last 15 years for an average of $1612 per contract before commissions and fees.

The March Japanese yen jumped up last week to a new contract high of .9565, helped by Japan's small exposure to sub-prime mortgages and moves lower in the equity markets.  For the short term it appears an interim top has been made and prices appear to be heading lower, this of course will largely depend on what the Fed does this week and how the stock market reacts.  If prices do move down to .9100/.9150 we will most likely start directing clients to get long as we think a bounce in equities and pullback in the yen are both short term moves.

Headline inflation in the 15 countries that use the Euro hit a 6 ½ year high which is well above the ECB’s preferred range of just below 2%, which leaves the ECB reluctant to follow the Fed in cutting interest rates even despite signs of slowing growth. Currently we see no reason to be long or short the Euro as prices could go either way.  Keep in mind if US dollar selling increases because interest rates have gone from 4.25% to 3.0% in less than one week the Euro could benefit.

We maintain that the dollar will continue to be the world’s reserve currency and if the volatility and uncertainty persist in global equity markets, the dollar should not loose too much ground even with falling rates. We are not issuing a buy recommendation on US dollars but we are fairly confident that the November low should hold for now. 

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Corn:   Weekly export sales showed 1.595 m.m.t. of corn was sold last week. After a quick 50 cent drop from mid January’s high, corn has already turned around and started trading up again, ending the week just below the psychological $5 level on March.  Because corn and beans planting season is still 3 to 4 months away, unless demand side news arises the outside markets will continue to be the major influence on daily direction.  Longer term fundamentals remain bullish but near term risk remains if next week brings month end profit taking.  Index fund psychology is to continue to take profits on front month old crop futures on rallies and re-enter longs on further out new crop futures such as December corn. We will continue to advise buying breaks in December 08’ corn maintaining that prices will trade at $6 on the board prior to April.  We would not rule out another leg lower before prices make new contract highs. RSI and stochastics are trending down from an overbought condition and favor the sell side. The price trend is still up, but is in a correction. The Eliott wave study shows the correction coming back down to the 430-450 area, and then being ready for another leg higher.

Beans:   Weekly export sales showed 663 t.m.t. of beans were sold last week. Like corn, beans too experienced a pullback loosing 1.52 from high to low in just 7 sessions. Traders are apt to look at the 40-day moving average of 12.07 or the 38.2 % retracement of 11.84 as the areas of support. March soybeans are working on a contract high reversal top formation, and now may be finding more selling as the 9-day moving average has crossed down below the 20-day moving average. Open interest is down sharply during this setback, suggesting that most of the decline is due to long liquidation. Longer term fundamentals remain bullish with near term action uncertain. 

Soybeans suffer from pressures associated with the notorious "February Break." US producers use the new tax year to convert grain into cash; but inland rivers freeze and flood, and stocks build at interior locations. As the new South American crop is "made," usually in early February, the world market is assured of another six months' supply. But by mid month, with prices low, the market also begins to realize that far more than half the US old-crop supplies have already been consumed. The remainder must stretch until harvest of the next crop, still but a twinkle in producers' eyes.

Wheat:  Weekly export sales showed 422 t.m.t. of wheat was sold last week. Wheat's volatility is not for the faint of heart, on a shortened trading week the average daily range was 41 cents on March CBOT wheat.  This is a classic case of how to get a margin call if you fall asleep at the wheel.  Demand is not the driving issue here.  It is Minneapolis Exchange spring wheat futures that drive all the exchange prices as they continue to keep pace with March and May beans as beans and wheat compete for the same acreage.  You will notice March and May beans and Minneapolis March futures maintain a close price relationship.  This relationship will continue until the March 31st planting intentions report comes out by the USDA.  KCBT wheat will break off on their own when dormancy breaks in March, for now prices should stay between $9-10.  March CBOT wheat has support at 9.13; the 61.8% Fibonacci retracement level with resistance at 9.75/9.80.  Since 1983 all but one (2006) of the last 13 rallies in March CBOT wheat futures have reversed in February.  Look for KCBT to gain on Chicago wheat in coming weeks as well, we will go into more detail next week.

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March cocoa advanced just over $100 on the week and made its way back near contract highs and based on the most recent commitment of traders report index traders are still adding to longs, currently 29,090 longs vs. 1,190 shorts.  If long look to roll from March to May this week.  Although it appears prices will continue higher for now we would advise waiting for dips as the train has left the station, unfortunately this time without our clients on board. 

Even though prices could go either way and we are not nearly as bullish short term as we are longer term, sugar futures should be in your commodity portfolio.  Prices could come down short-term but the greater risk we feel is not being positioned and to see the market begin its next leg up. Even if prices come off a full penny that is only $1,120 per contract and if you look at the potential profit of 3-5 cents ($3,360-5,600) longer term we think it is worth the risk.  Ideally we get a break in the short term, if we are so lucky BUY sugar and hold it. For traders who still believe in buy and hold apply it here and we think you will be handsomely rewarded. 

March FCOJ is starting to look more attractive on the charts but as we have previously stated we’re not interested unless prices trade closer to 120.00.  Last week prices gained just over 3 cents but were contained by the 50 day moving average which should serve as good overhead resistance at 139.50.

For now the 50 day moving average has supported cotton as it has failed to trade below on 5 attempts in the last 2 weeks.  This could change unless exports start to pick up.  The export numbers show shipments running at less than 38% of USDA forecasts at the midpoint of the marketing year. That means that 355,000 bales need to be shipped in an average week in order to meet the estimates. I cannot see that happening. This will likely translate to lower prices which are going to set up a tremendous buy in July and December futures that we expect to see trading significantly higher in coming months in order to compete for acreage.  July should be able to be bought closer to 68 and December 08’ closer to 72 cents.

We recommended clients to start getting long May coffee using 10 cent bull call spreads last week.  Prices chopped around 135.00 last week and look as if they may be contained between 131.50 and 135.50 for now.  In coming weeks we expect to break out of this range to the upside and we will use this sideways consolidation pattern to accumulate longs for customers expecting a new contract high in May coffee in coming months. 

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Gold has been serving as a flight to quality and as an inflation hedge of late. This has enabled front month gold to trade as high as $924.30 which is quite an accomplishment as prices were at $800 just before Christmas.  If stocks trade lower do remember that gold may need to be liquidated to raise margin money during a sell off.  Our target of $855.60 was hit just barely in overnight trading on Tuesday of last week when prices pulled back near the 20 day moving average before finding support.  We are still looking for another leg down to wash out the weak longs and allow our customers a better long entry as prices are extremely overbought.  We feel it is important to be long as inflation will in the future only lift prices further, but would prefer a lower entry and are ok being on the sidelines this week as a variety of market reports should allow at least a temporary setback.  On April gold we will recommend entries closer to $850 but if prices do not correct soon we will start advising bullish option strategies, most likely buying $50 spreads.

Silver much like gold is a market that we want to position clients long in but preferably from lower prices as it too is extremely overbought and in our judgment, due for a major washout before trading to new highs.  March silver is trading near contract highs of $16.715 currently.  Temporarily silver may surge higher but we view getting long at this price as too grave of a risk.  During the first 2 weeks of February, March silver has posted gains consistently trading higher 12 of the last 16 years gaining a total of 233 cents/ounce since 92’.  However, traders should not overstay their welcome as the futures approach FND prices tend to reverse, and we shall recommend using the latter part of February and this expected pullback to establish longs.

A power shortage in South Africa resulted in the closing of several gold and platinum mines last week. South Africa is the world's largest producer of platinum so these shutdowns caused prices of platinum to spike $121.5 or 7% to a new contract high on April taking prices to almost $1700. Prices will most likely continue higher as the seasonal trend into March is for higher prices but be aware of the volatility as just last week the trading range was $188.80 at $50 per $1 move ($9,440).

If a portion of your portfolio is not already in gold or silver we highly suggest you diversify into these metals as we expect to see much higher prices in coming months due to inflationary concerns.

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Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Before trading MB Wealth recommends that you should carefully consider your financial position to determine if commodity trading is appropriate for you. All funds committed should be purely risk capital. Past performance is no guarantee of future trading results. There are no guarantees of market outcome stated, everything stated above are our opinions.