For March 17th - March 21st 2008

By: Matthew Bradbard

About 4 years ago a broker that I worked with coined a phrase about the commodity markets that has recently come into my mind, “Suspend your disbelief!”  Who are we to say a market is close to a top or close to a bottom? Just because a market generally moves higher or lower a certain time of the year, it repeating itself once again could in fact be a fallacy. Yes, one must pay attention to trends and past performance, but now more than ever the markets seem to act differently. We are in uncharted waters for a lot of these markets and new highs will be made in coming years. What was support and resistance is now becoming less relevant. It’s our belief that money will continue to pour into commodities. Commodities are fast becoming a respectable asset class, feared by so many just years ago and now viewed as a haven from a weaker economy. What a change in times! I guess the point being is that, as traders you must evolve as the market evolves and know that conceivably, things that have worked in the past may not work in the future. Take one situation at a time, and just as I need to remind myself on a daily basis, remember that there is substantial risk with increased volatility, be cognizant that loosing trades are a part of trading, stay with winners, and let the market tell you when to exit.  Remember, you are not developing a sports franchise where the win-loss ratio is truly important, but rather the bottom line here is, are you showing appreciation?

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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Record after record crude continues to march higher as we made 7 records in 7 days! If you are not on the train don’t try to time this market, as the daily swings can make even a veteran trader queasy. Even with a much larger than anticipated build in inventories, last week oil surged higher shrugging off any bearish news. April will go off the board this week and make May the front month. Support on May crude lies at the 9 day moving average just under 107, with resistance at the contract high 109.70. March is the second strongest month on record for crude, so although it sounds appealing to pick a top, it may be an expensive lesson as some of our clients learned last week. March is usually when refineries switch production from winter gasoline blends to summer blends. When refineries anticipate a busy summer driving season, they tend to buy crude aggressively, pushing prices up which we now are seeing.

What we have witnessed in heating oil of late is nothing short of remarkable, as prices have moved almost 30% higher ytd, gaining 70 cents/gallon. As a trader, this is the type of move you dream about; unfortunately for much of this trade we had client’s positioned short heating oil and long gasoline. This is a prime example of what has worked in the past may not work moving forward. The smart money has participated in this spread in years past and reaped the benefits, this year this approach cost you dearly. We are realistically convinced that when the high in heating oil is put in, you will see prices come off in the neighborhood of 30 cents a gallon, the question is, can you endure the trade until a high is made? Most of our clients cannot. Friday’s close was almost 7 cents off the intra-day high; could that be a warning sign of an impending top? Although we are friendly to gasoline on pullbacks, we are not comfortable advising a trade with these massive swings on a daily basis. It appears for now that gasoline will follow crude higher or lower.

Natural gas prices seem high, but who’s to say they can’t go higher. I remember when clients told me they had missed oil when it was at $70, then $80, and well…we all know how this story ends. In the last 17 years, natural gas has moved higher 14 times and moved down 3 times for the month of March. On average, prices advance 7.1%, but this year could be greater as prices in June have already moved 5.5%, from 3/3 thru 3/14. We did experience a change in tide Friday as we saw prices retreat almost 40 cents, assuming Friday’s high was an interim top, the market could correct 80 cents with no chart damage. If you can brave this pullback, buy dips looking for 9.40 to hold in the June contract. Make sure you are well capitalized as a $5000 move on the big contract can happen at a moments notice.

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After the close, the USDA estimated last week's beef production at 495.8 million pounds, up 3.2% from a year ago. Pork production was estimated at 461.1 million pounds, up 6.6% from a year ago. Feeder cattle and live cattle ended lower on the week but appear to be putting in a bottom. Last week’s low in April feeders of 101.300 will need to hold to see higher pricing, the June low in live cattle of 90.550 will also need to hold before we advise long entries.

Too much pork production and weak news for the U.S. economy pushed hogs down to a new contract low. We remain long in April with our clients down roughly 2 ½ cents looking for a rebound into this week. Both the RSI and stochastics are showing an oversold market and we feel prices are low enough to entice exports. It is certainly possible that we hear an announcement from China that they may need to buy pork, as the recent snow storms killed a great deal of their pigs. If prices continue to loose ground, we will be forced to cut loses, but if we are able to rally back above 58 in April, this week we may have dodged a bullet. June would need to get back and close above 92 for us to feel we are out of the woods.

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Stocks:  After experiencing 3.0% up and down swings on multiple days, the end result was not as impressive. The Dow ended the week up 57 points or 0.5% to 11951. The S&P 500 index fell 5 points or 0.4% to 1288, and is now down for three straight weeks. The NASDAQ was flat trading both sides of 2210. As we have voiced week after week, sell rallies, as we feel it’s just a matter of time before the January lows are challenged. Make sure if you’re trading the indices you roll over to June if you haven’t already, as March goes off the board this week. 1315 should serve as resistance on the S&P as we find a new low and support level, on the Dow we don’t see 12250 penetrated until we reverse.

We cannot stress enough how vital it is to hedge your portfolios and protect against further selling. Think of it as insurance on one of your largest assets. We have refrained from recommending intraday trading on equity futures, as we would equate that to gambling, but will continue to recommend hedges for all stock investors. Call to inquire how you can protect your stock portfolio with index futures and options. 

Bonds:  Investors have and will continue to move money into treasuries, not so much to capture the yield, but they’re leery of loosing money elsewhere. Further liquidity problems have fueled fears the credit market crises is deepening. A flight to quality into treasuries sent yields on the two and five year notes to the lowest levels we’ve seen since 2003. The fear of uncertainty has made it acceptable to get a lower yield but to at least preserve capital. At a scheduled FOMC meeting on Tuesday the Fed is expected to cut rates; it is not a question of if, but how much, with economists predicting anywhere from 50 to 100 basis points. The current rate stands at 3.0%. The futures market has fully priced a 50 point cut and indicates a 90% chance of a 75 point cut. June bonds gained 2 ½ points last week and appear poised to make a run at the contract highs of 121’24 with some help from the fed and further selling in the stock market.  Pullbacks should be supported just below 119 on June. Ten year notes have already made a new contract high and also look like higher prices are in the future, support lies just above 118.

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All currencies will focus on what the next move from the Fed is this week. A week ago, a 100 basis point cut may have seemed unthinkable to some; now, a cut from 3% to 2% is entirely possible. The FOMC decision might boil down to a judgment about whether a bigger move would be helpful, given the suggestion of "panic" it might carry with it.

The June Euro finished 3 cents higher on the week at a new contract high of $1.5590 in spite of concerns that central banks may try to intervene to support the U.S. dollar. Since 2/8 prices have moved 14 cents higher at $1250/cent which equates to $17,500/contract. It is almost unbelievable as I write this, but as the dollar weakens the Euro has been one of the major beneficiaries. As long as the US dollar continues to weaken, prices will continue higher as whispers of $1.6000 start to emerge.

It was big news last week when the Swiss franc traded at par with the US dollar, but as I write, we are trading 2.5% above that level at a new contract high, as the safe-haven play is alive and well. The trend is certainly up, but support is far from current levels so pick your points carefully. As we are at new highs there is no upside resistance.

Canada reported that productivity was down .8% in the fourth quarter, the biggest decline in twelve years, blamed on the loss of manufacturing jobs. The June Canadian dollar remained in a relatively tight range only advancing 43 ticks on the week. For now, it appears the middle of the Bollinger bands on June, around 1.0050, should serve as support with 1.0200 as upside resistance. We expect the Loonie to continue to look for guidance from metals and energies.

It is evident as of Sunday night that high yielding currencies like the Australian dollar are being unloaded as I go to bed, the trading range just today stands at nearly 5 ½ cents as stops were probably run in the night session. This is similar to what happened months back, when inside of a week the Australian sold off 6 cents, only to get it completely back only weeks later. This move to the downside, most likely, will be overdone and we’ll use it as an opportunity for our clients to get long closer to .8900 on June. Look for direction in the yen to help time an entry in the Aussie.

The credit crunch continues to crimp the British housing market, with sentiment tumbling to an 18 year low and the number of new mortgages also hitting lows. This is a fine line they dance along, waging a fight against a slowdown in growth and a fear of a sharp pick-up in the inflation rate. If there was one currency you could sell against the dollar, look no further, as we feel the June pound should make its way back to 1.9600.

It sometimes takes countless times to hear the same thing before it registers, but once again we will inform traders that as long as the stock market moves down, the Japanese yen will move up, as the carry trade gets unwound. As of this writing, the June yen has gained 3% Sunday night and is expanding on its gain which has been 15% so far this year. A new Central bank governor will be elected this week in Japan, but as of right now we don’t know who will fill this void, depending on who is elected, the yen may move so pay attention.

In recent weeks I felt like a patriot championing the dollar but enough is enough, the dollar is falling like a fat man on thin ice. Now at record lows, where we stop largely depends on the credit market and what the Fed does with rates this week. After breaking support back in late February the dollar index has fallen another 5.0%. Although prices are extremely over extended, if the spread in interest rates continue to widen and further credit problems develop, dollar selling could even intensify. At this point buying dollars is like catching a falling knife, wait for a bottom!

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Corn:  Weekly export sales showed 768 t.m.t. of corn was sold last week, up almost 20% from the prior week. It was a neutral number coming in the middle of pre-report guesses. The USDA crop report was a non-event, keeping ending stocks “as is” with no changes throughout. The market anticipated a cut in exports, but the USDA failed to deliver. December corn made new contract highs last week for the fourth consecutive week trading as high as 590’6. For much of the week we remained range bound between 572 and 582. With the March 11th USDA crop report behind us, all eyes will now focus on the March 31st planting intentions report. Expect tremendous volatility, as it appears the grains will be influenced by volatility in outside markets. We expect a run up into the March 31st report on fear it will not show enough acres to be planted considering the growing demand. Support on December corn comes in at 564 and then 551. Pullbacks should be bought as we are looking for higher pricing. May support lies at 547’2 with minor resistance around 575.  If you want to be net long, we would suggest buying December, if you want to be spread, sell May against December. Currently the spread is valued at 15’6 and we feel this could easily widen to 30 plus cents and you won’t need to worry as much about the day to day unpredictability.   

Beans:   Weekly export sales showed 257 t.m.t. of beans were sold last week. This is under the four week average by 40% but our Asian brethren seem to remain active buyers. Increasing demand continues to outstrip supplies worldwide; look for the U.S. to return as the world's primary port of origin for beans late April, when South American sales from their harvest wind down. I expect a sharp run up into the March 31st planting intentions report, as the market’s fear of not showing at least a 5 m.a. increase means we may run out of beans in 2009. Last week’s crop report was more bullish than the market had expected; putting ending stocks 20 m.b. lower than previous reports at 140 m.b. New crop November beans are supported at 1272, which if able to hold early in the week, should be the beginning of the next leg higher. If broken we could see 1220 relatively quickly. First resistance lies at 1305 followed by 1338. With 2 consecutive closes above last week’s highs you should be safe to get long. I use that term loosely as it seems very little is safe in commodities with recent volatility. May should be supported around 1340 to 1345. We are looking for the lows made Sunday night into Monday to hold and would recommend slowly working your way long into the planting intentions report at month’s end. 

Wheat:  Weekly export sales showed 210 t.m.t. of wheat was sold last week. The number came in light but the real news was Tuesday’s USDA report. Wheat ending stocks were cut 30 m.b. to 242 m.b, taking the stocks-to-use ratio for wheat to the lowest level since 1946-47. Massive price swings have become the norm in wheat and this past week was no different. For the May contracts in CBOT wheat, the H/L range was $2.37 with KCBT range only $2.21. We will advise customers to stay far away from these markets until things calm down. As long as you have a fear of flying, go to Vegas and play your odds there as opposed to gambling in the wheat market. May CBOT wheat has support at 1126 and resistance at 1250, May KCBT has support at 1177 and resistance just above $13. KCBT should continue to gain on CBOT; gaining roughly 20 cents last week, but we will advise clients to be spectators here as we view there to be better risk/reward trades out there.

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Dow Jones Newswires continues to report that growing conditions continue to be favorable for Brazil's upcoming coffee crop. They also said that Mercon Coffee estimated Brazil's crop at 53.9 million bags, up 43% from last year's harvest. May coffee fell just about 2 cents on the week but it was a mixed bag as we traded higher Monday thru Thursday, before loosing 9.35 cents on Friday alone. When you see this type of movement in one trading session we don’t want to be involved. Wait for this market to calm down.

May cocoa set another new contract high aided by US dollar selling as it advanced $200 on the week and is getting ever closer to the 3000 level, which has not been reached since 1980.  As long as dollar selling persists cocoa prices should move higher, but it will be one of the hardest hit commodities if and when the dollar starts moving higher so if long trail stops. Support is just below 2800 on May with resistance at 2970.

Sugar impressed us last week not because it moved higher but rather because it held its own as other soft and agriculture commodities lost ground.  Sugar remained inside of a range trading on both sides of 13.50 on July.  We are advising the accumulation of October calls and have started to work back long futures in July and October for our customers.  For now this market appears oversold and we would expect sugar to break out of the recent trading range and make its way back up to the contract highs in coming weeks. 

May FCOJ is below 120, so it’s on our radar, but we have not issued a buy recommendation to our clients as of yet. We would like to see if the contract low holds this week, which currently stands at 115.50. Looking at the charts we may want to step in long soon, but there is a seasonal sell on March 21 that has worked 14 out of the last 15 years for an average profit of $833, so we will play it by ear.

Cotton had a lot of movement day to day but by week’s end only advanced 2 cents in the futures on December. We were able to trade out of the May shorts and December longs discussed in previous commentaries for our clients and we are now on the sidelines. With the plating intentions report just weeks away we are looking for an entry to get long this contract for clients as close to 78 cents as possible. In terms of options strategies, if we are not able to get the entry we are looking for in futures, we will keep you abreast. More than likely we will play synthetic futures (short a put and long a call) or bull call spreads in July for clients.

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36 out of 51 respondents in a recent survey conducted from March 7-11 agreed the economy is in recession. Why I bring this up is in a recession and in times of uncertainty gold tends to out perform other asset classes. This has certainly been the case of late as gold has advanced $180 or just over 21% ytd. Gold sliced thru the $1,000 level like a hot knife through butter last week. We expect gold to hold up well in this environment as worried investors park cash, as the dollar weakens further and additional misgivings are exposed in the economies abroad. Although, it may not be the most prudent advice, close your eyes and buy as prices just keep moving higher. We are not saying to buy gold and forget you own it, one must mange the trade. First decide whether futures or options are more appropriate.  We do not expect gold to move higher in a straight line and in fact we have been looking for a pullback in recent weeks, but being on the sidelines has cost our clients money so we would now advise slowly working long looking to add on strength. June gold should find support on pullbacks around $1000.  If we were to see a violent move below $1,000 look to step to the sidelines.

Silver, or poor man’s gold, should shine as well in this environment as more and more money is flowing into both precious and industrials metals. May silver remains well supported above the 9 and 20 day moving averages and will most likely make a new contract high this week on a trade above $21.325. In fact, if we had to pick either silver or gold we prefer silver for our clients as we feel it needs to catch up to gold and on a % basis, all things considered, one may get more bang for their buck. Current technical indicators support a move higher and with increasing momentum we cannot rule out a move to $25 on this leg if we continue to see dollar weakness. Depending on the size of your account it would be our recommendation to either play the 5000 ounce contract, 1000 ounce contract in May, or to purchase $1 bull call spreads in July. 

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. Calculations of profit and loss have not factored in commissions and fees.