For March 24th - March 28th 2008

By: Matthew Bradbard

I never thought a four day work week could be so long. The media is calling it de-leveraging. Think of it as a margin call globally as funds, institutions, and speculators unwound positions resulting in significant volatility and price reductions commodity wide. Some notable moves include cocoa down $589 or 20%, silver down nearly $4 or 19%, crude oil had an $11.70 range H/L. The grain complex from oats to wheat traded lower with multiple limit down moves. Not everything moved lower, the US dollar rallied 2.0% on the week after the Fed cut rates only 75 basis points and the markets had priced in the “full monty” or a 100 basis point reduction. Although last week may have been painful, with many investors losing money in commodities, we are convinced that the secular bull market in commodities will live on for many years and will advise clients, as difficult as it may be, to use these price spikes lower as buying opportunities. As Stephen Leeb said in a recent letter to his subscribers, “Ride out the dips rather than trying to time your entry and exit points. The pullbacks will chase out the weak hands and the declines are likely to be merely temporary retreats along the way to much higher prices down the road.”

In addition to writing the newsletter you are currently reading, I also read a variety of newsletters from other commodity professionals. Some key points stuck out in a recent Jake Bernstein letter I wanted to share with you all:

“The average trader is being priced out of the markets by high margins, forced out by large stop losses or scared out due to large day to day and minute to minute price swings.” Traders, hedge funds, and other speculators are jumping into commodities like never before. “This mass entry into futures as the best game in town is destined to wipe out many new traders as well as a number of hedge funds. If you’re a newcomer to the markets I warn you in advance that unless you use large stops you WILL most likely lose money.” My position here is don’t commit any monies that are not viewed as risk capital and seek the help of a professional if you make the leap of faith into commodities.

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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The U.S. Department of Energy said that underground supplies of natural gas were down 85 billion cubic feet last week to 1.313 trillion cubic feet. Supplies are now down 14% from a year ago. June natural gas closed down 90 cents on the week closing at $9.23. This is a change of pace, as this past week was the first week in the last seven that natural gas prices were lower. As predicted, we got the correction we were looking for, we were reminded that sometimes it is better to be lucky than good. First support is at last week’s low of $8.84 followed by $8.40; the high in mid-January. Resistance comes in around $9.50 which should be the level we stay at for a while until the market picks a direction. Currently we favor a move to the upside, looking for an entry for clients after this current correction runs its course. The historical tendency for the last 17 years in June natural gas remains up until mid-April. Past performance is not indicative of future results.

The Department of Energy said that crude oil supplies were up 200,000 barrels last week and 700,000 barrels were added to the Strategic Petroleum Reserve. May crude oil ended the week down $6.90 at 101.84, caught in the broad sell-off of commodities. Oil had not had such a dramatic sell-off in dollar terms since January 91’.  Friday’s close was below the 20 day moving average; the first time this has happened since February 7. First support is the 38.2% Fibonacci retracement from February’s low and the recent high on March 17 at 101.05, below there at the 40 day moving average at 98.10.  The momentum is to the downside but we wish not to approach this market from either side for clients as we view the current volatility uninviting. Trading oil in an environment with $5 daily swings, which makes it more like a gambling parlor than an investment. There will be a time and place to trade again, but we wish to let the dust settle and the “de-leveraging” to play out before venturing in with client capital.

Along the same theme with increased volatility, we prefer not to be in the distillates with clientele either.  We have not forgotten about the recent spread, long gasoline and short heating oil, and we most likely will look to reposition in this for some of our clients down the road.  If you have been following this relationship of late, you can see this is a bumpy road and is not for the faint of heart. One must also consider their account size before initiating a trade in the energy sector. The recent volatility may be the beginning of an ongoing theme where 5-10% swings may become commonplace.

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Last week the USDA said that, as of March 1st, there were 11.853 million head of cattle on feed, up 2.2% from a year ago and a little less than expected. Placements in February were up 4% and marketings were also up 4%. June cattle closed about 1/3 of a cent higher on the week at 90.975, after action on both sides between 89.80 and 91.75 on the week.  Looking at the charts, a bottom seems to be forming in live cattle, if one wanted to approach cattle from the long side, you could buy April and sell rallies on June, as the current spread shows June at a slight premium. If a bottom is in place, April should quickly advance to a 2-3 cent premium over June. Feeder cattle caught a bid late in the week, encouraged by the recent drop in the price of corn and appears to be moving higher. Monday’s low of 107.500 on August should hold, first resistance emerges at 111.00 followed by 112.00.

Last week the USDA said that frozen pork inventory as of February 29 was 603 million pounds, up 25% from a year ago. Frozen bellies totaled 79.4 million pounds, up 70% from a year ago. Our clients may have dodged a bullet as April hogs finally appear to be moving in the right direction; up. Next week will be the determining factor, if we can trade above the 9 day moving average and make our way back to positive territory. We are still looking for this low level to entice exports, but as time diminishes, it becomes less likely that the gap formed in late February will be filled before the LTD, April 14.  We will look to trail stops for clients and advise you to do the same.

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Stocks:   The Dow rose 3.4% ending at 12,361 in a rally that may well be short covering, so don’t celebrate just yet. The S&P rallied 3.2% to 1329 and the NASDAQ leaped 2.0% closing the week just under 2259. Volumes surged, but bear in mind it was triple-witching so much of the activity could have been position squaring. 2-3% swings on a daily basis are here to stay in indices, as the tug of war between bulls and bears will exist until the current credit crunch and housing demise is behind us. Chartists are preaching a double bottom but it is too early to say. In order for us to be convinced this is just more than a dead cat bounce, we would like to see consecutive closes above the 50 day moving average; 1347 on the S&P and 12,366 on the Dow.

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:  The Fed indicated that it was giving increased attention to elevated inflation levels, thereby signaling that an end to the current rate cut cycle was fast approaching.  Where will the Fed will stop, 1.75%, 2.0%, no one knows, but we are closer to an end then we were before a 75 basis point reduction last week, taking the rate from 3.0% to 2.25%.  The Fed has been pulling out all the stops to increase liquidity and ensure smooth functioning of the financial markets, cutting its target and discount rates again, extending loans to investment banks, and even getting involved in a bank takeover. With money flowing back into the stock market we cannot rule out a retraction in the debt market; June bonds should find first support at 118’11 with notes at 117’22.

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Markets in Australia, New Zealand, Hong Kong and the UK are closed on Monday.

What a change a couple days can bring. Within spitting distance of 160, 5 sessions ago, the Euro now sits just above 153 as of Sunday evening.  Momentum suggests a further move lower with 1.5274 as next support followed by 1.5105 for June. There is a seasonal long in mid-April that has been successful 8 of the last 9 years; we hope to get long for clients from lower levels.

The move lower last week in the Swiss franc is reminiscent of the violent correction in the Canadian dollar last November. The Swiss has quickly given up 5% and appears poised to move lower, first support at .9718 followed by .9556. As long as the US dollar stays at these levels money should flow out of the Swiss currency which was previously acquired as a flight to quality play.

The Canadian currency was hit hard as energies and metals swooned lower last week as investors fled for the exit doors. A sizeable correction in hard assets helped contribute to virtually a 400 point move lower, taking the currency down to the bottom of the recent trading range. The June Loonie has been contained within a .9700/1.0200 range for the better part of 5 months. If the sell off in outside markets is contained or even slows down this could be a good entry to get long looking for a grind higher back to at least par.

Being a commodity currency did not help the Australian dollar last week as it lost 400 points trading below 89 cents for the first time since mid-February. Without doing any chart damage, buying must emerge closer to 88 if we were to get to those levels again. There are 2 seasonal buys coming up in the June Australian dollar, one starting on March 27 and one on April 3. Past performance is not indicative of future results.

The British pound, as we predicted last week, did in fact make its way back to 1.9600. Although it is tough to trade a currency or commodity right after losing money, we are reminded that there is no such thing as a good or bad market, but rather good or bad timing. As the wounds were still fresh, traders that re-entered the pound short would have made their money back, that was lost in the previous short position, just days later. While the easy money has been made on this short, it appears there is still some room to the downside as we don’t expect to see major buying to emerge until 1.9450.

The Yen could go either way from here so we would advise waiting for a better entry. We can’t rule out a move lower to the .9750 level in June. If you want to be long from these levels, we would recommend playing June call options, but would favor long futures from lower levels. With waning momentum the MACD supports a move lower, in addition to a US dollar that is rebounding and a stock market that is relentlessly fighting its way back to higher ground. Remember the inverse correlation between equities and the yen. Also consider the BOJ has no central bank governor, this could cause some indecision to be reflected in their currency.

The US dollar was one of the few places you could find green on the board last week. In fact the 2.0% advance in the dollar most likely accentuated some of the down movement in commodities.  Although we do not support the move and will not try to justify it, the market is always right and the dollar looks to move higher into this week. We did form some gaps on the way down that may get filled in the days to weeks ahead at 74.48 followed by 75.78 on June. We don’t see the dollar getting much above those levels even if we are able to reach there. For a true bottom to be in, the Fed would need to signal they are done cutting rates which we do not believe to be the case.

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Corn:   Weekly export sales showed 749 t.m.t. of corn was sold last week. This is the fourth consecutive week of sales under 1 m.m.t.  Clearly demand has softened, as prices traded from the low $5 level to almost $6 in recent weeks. This is of course before the recent correction that has pulled prices back to the $5 level. After a week of fund led profit taking, we start a new week where grains should start to get a mindset of their own as the March 31st planting intentions report is fast approaching. The March 31st USDA report has the potential to be extremely bullish and could show a steep reduction in acreage from last year. After a drop in December of 55 cents last week, we are looking for an interim low to be established this week, and to approach corn from the long end for clients via futures and options. Current support comes in at 519, followed by the psychological level of $5, and then the 100 day moving average of 490. Outside of just technicals, corn is preparing for planting to begin and a risk premium has yet to be built in, so without any surprises from the USDA we would expect corn to make new highs.

 Beans:   Weekly export sales showed 438 t.m.t. of beans were sold last week.  It is a decent demand signal, but US sales continue to fall off as Brazil overtakes the US as the world's primary exporter of beans for at least the next month or so. Next week traders will focus on getting positioned for the USDA planting intentions report. It is our opinion that you should not be short into this meeting; traders should have a partial long position looking to add on in signs of strength. The report is expected to deliver bullish sentiment as there may not be enough perceived acreage to meet demand. Without the “de-leveraging” we experienced last week, prices most likely would not be where they are, with November trading below the 100 day moving average for the first time since August of 07’. Technically November has support at 1125 followed by 1100. We suggest paying close attention to how outside markets start the week, looking to gauge the outlook of grains by taking the pulse of outside markets. We will look to lightly leg into longs for clients as stated above most interested in the new crop. Virtually all our indicators are friendly and we would not rule out a violent reversal higher.

Wheat:   Weekly export sales showed 17 t.m.t. of wheat sold last week. Like corn and beans, wheat too sees the March 31st planting intentions report as critical to when we get our first look at spring wheat acres to go to seed in May. Presently, we are at a 60 year low on ending stocks, leaving us one dry growing season from running out of wheat. If the sell-off in commodities continues, wheat could be hit hard as prices probably moved too much on the upside in recent months. Wheat remains on our no interest list and we have no current recommendations.

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May Cocoa closed lower for the fifth straight session. This market has been moving lower since posting a contract high 2 Fridays ago at 2971. Prices have dropped over $700 on fund and speculative liquidation, the market is approaching the 61.8% retracement level and the 100 day moving average of 2248. There has been little news in this market, but as we have frequently reminded readers and clients, cocoa has a strong correlation with the British pound and inverse relationship with the US dollar, so a down move should have been expected. We expect the 100 day ma. to serve as mild support and would expect the pace of selling to abate; resistance comes in just above 2500.

July Sugar was down 148 points on the week closing at 12.22 after trading as low as 11.60. Like many commodities, sugar was pressured by investor liquidation. Prices in recent weeks have lost almost 20% after a run up of 45% from the beginning of the year. Currently, prices are oversold and as we have continued to voice, we will keep a portion of our client’s money long sugar looking at the long term for sugar prices to be bid much higher. If you aren’t already positioned in sugar we would advise getting long July or October futures or October options at current levels.  Be careful getting too heavily weighted in sugar, as April is the 2nd weakest month on record.

May OJ pushed to a new contract low last week trading as low as 111.50 ending the week at 113.65 or 3.35 cents lower. FCOJ is a market to keep an eye on if commodity funds begin to jump back onto the long side. FCOJ could be one of the markets they become active in as it could be viewed as being undervalued. This can have a dramatic impact on prices, albeit the fundamentals are not bullish just look at the recent performance of cocoa and sugar. Support for May comes in at last week’s low of 11.50 with resistance at 120.

Coffee prices in less than 2 weeks moved 30 cents lower, which in dollar terms is $11,250 per contract.  I point this out because you can’t fall asleep at the wheel when trading commodities, as large movements and increased volatility are here to stay.  May coffee prices appear to be oversold, but we are yet to call a bottom, with April fast approaching we look for more evidence of a bottom, as April performance is no help; the last 34 years we have had 17 up months and 17 down months. Current support is just below 126 with resistance coming in at 140.

Sometimes you get what you wish for. We were looking for a better long entry for our clients in December cotton, ahead of the plating intentions report, and with a drop of 7 plus cents last week, the market delivered. For now, support seems to be holding around 77 cents, the daily stochastics are oversold and we will start to lightly get long for clients. So far the best strategy we view is getting long December futures, as close to the recent lows as possible and buying 70 cent May puts. As of Friday our clients bought these for 2 cents; with a delta of about 40% we are somewhat protected from further selling. We only have 3 weeks so this will be valid thru the planting intentions, but yet we didn’t have to pay for a lot of time. If cotton confirms a bottom and trades up from here we will need to overcome the premium paid for our protection. Our feeling is that 2 cents or $1000 is worth the protection. For option traders we are currently pricing July and December call premiums, contact us for strategy.

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I think the saying goes, I would rather be early than late, as late comers to the metals complex paid the price. After making a new record high and trading at nearly $1040/ounce gold prices retreated violently closing down $113 from the week’s high at levels not seen since late February 08’. Gold experienced its largest 1 day fall since 1980, so this has some metal traders on egg shells. We were at these prices just weeks ago and more than likely we will be back at the highs in just a few more weeks. A moderate correction, most likely on profit taking, is a whole lot different from the $1000 level as opposed to the $500 level; 5% from 1000 is $50 as opposed to 5% of 500 only being $25. Next support in April gold is 883 or the 61.8% Fibonacci retracement from recent H/L. Because we believe inflation will continue to plague our economy, we would look for an entry to lightly step into June futures or $50-100 bull call spreads to weather the volatility, looking for June gold to find its way to 1100-1150 before expiration.

Prices in silver this last week were downright ugly as prices lost their allure. May silver lost almost $4 or 19% before finding support just below $17 at the 50% Fibonacci retracement level. The only reason silver did not lose more value, is the markets were closed Friday for a holiday. It is our opinion there is a little more downside. We will be closely monitoring the dealings looking to buy this correction via futures or call spreads for customers as we feel there is more upside left in this market. Prices could come down to the low $16 range without doing any chart damage on both daily and weekly charts. RSI and stochastics are close to a buy zone but we would advise to wait for confirmation. 

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.