MB Wealth Corp. Weekly Commentary
Energies Livestock Financials Currencies Grains Softs Metals
For May 5th - May 9th 2008
By: Matthew Bradbard The commodity bubble has burst and money is flowing out of commodities back into securities. Yeah, well, that was the story for last week but we don’t consider it to be a prolonged trend. Why would a secular bull market reverse on a dime; because prices are too high, I have been hearing prices are too high for years now. Need I remind you the cure for high prices is higher prices. Although there will be retractions in prices, we maintain our position that pullbacks should be bought as long as the underlying fundamentals have not changed, that what caused prices to get to higher levels still exist. If you are currently making trading decisions by watching the television or reading the newspaper, you are destined for failure and stress that you look elsewhere. In order to be successful you must go the extra mile and find other resources, whether it is technical or fundamental research. Furthermore, be disciplined and unemotional, try to eliminate greed and fear from your approach. For further suggestions, please read the following article titled "50 Trading Principles"
To find out exactly how we are positioning our clients in commodity futures and options, Contact us today at 1-888-920-9997. ____________________________________________________________________ Crude oil closed $2.63 lower having its first loosing week in the last six. This is only half the story since a $2.63 move is less than 3% at current levels. More frightening is the trading range on the week was $9.63, which in dollars is $9,630/contract while the margin for a single futures contract is less than $9,000, so if your timing is just a touch off it could be extremely costly. This is why we recommend being very cautious and waiting for a clearer picture before trading oil. Looking at the big picture or longer term, we may be the minority, but we expect energy prices to stay at these elevated levels for the foreseeable future. The only circumstance that would change our feeling is if you were to see a mass exodus from commodities, where as investors would continue to pull money from commodities and return to equities. We believe if investors think as opposed to just act, this will not continue. For now support on June comes in at last week’s low of 110.30 with resistance at the highs just below 120. On a move above 120 expect higher prices, perhaps 125 or 130 shortly thereafter. As we’ve discussed in the 2 previous commentaries, when heating oil breaks it could fall hard, prices on June are finishing 7 cents lower on the week and trading below $3.07 intra-day Thursday from a high of $3.32 a gallon just days earlier. The option play we recommended last week closed on Friday at $3390 in value, depending on your timing you may have been able to get a fill near $2,500 as we instructed. We didn’t take the trade for clients as we were trading other markets, but if you did we advise putting in a gtc order to sell for $4,000 or better. We expect the distillates to continue looking for leadership from Crude with prices predicated by a combination of the dollar’s direction, weather, and flows of capital from investors. Unleaded gas for June now appears to remain range bound between 2.80 and 3.10; we’ll most likely look to get long closer to the bottom of that range for clients. This range represents a trading range of $12,600, so gasoline should only be traded by well capitalized accounts. We are still searching for a long play, we have yet to figure out a strategy for clients where the risk to reward is justified in natural gas. Last week June started the week just off contract highs and although we did see a price set back, not enough to justify a long, June prices broke 3.5% and were down as much as 6.0% off the highs intra-week. With a cooler forecast in the 6-10 day, the price break may be short lived. Prices bounced off the 38.2% Fibonacci retracement just below $10.50, but indicators are still pointing towards a set back to the trend line just above $10. Although there is no debate the trend in natural gas has been up, the fact that funds still hold a significant net short position according to the most recent COT makes us err on the side of caution and will recommend waiting for a break to get long. ______________________________________________________________________ Last week the USDA estimated pork production at 436.2 million pounds, up 9.5% from a year ago. Just as we thought it was time to throw in the towel, (with our expectations of a break in hog prices), the market delivered as June lean hogs lost 4.45 cents or 6.0% on the week closing below 72 for the first time since April 14th. Resistance should come in at 74.50 with support at 72 followed by 70.20. If last week’s high’s can hold, we should see a gradual slide to April’s lows. The spread we mentioned last week, long August and short June at 1.85 premium to August, is currently at 4.00 approaching our target. Pork bellies could go either way so we would suggest standing aside. After the close Friday, the USDA estimated the week's beef production at 535.2 million pounds, up 8.1% from a year ago. On April 30th June live cattle failed to get through the 200 day moving average. After 4 weeks of up movement we finally caught a break as we closed 107 ticks lower on the week, closing just above 92. We are expecting prices to move south filling the gap from mid April just above 90. Trail a stop if already positioned short. August feeder cattle appear to be moving lower, our target is 106; resistance comes in at 108.50 with support at 107.20 followed by 106.25. ____________________________________________________________________ Stocks: Stocks broke a 5 month losing streak in April closing higher. The Dow finished at its highest level in 2008 last week, trading as high as 13,132 on June adding 198 points or 1.5%. The S&P 500 added 17 points or 1.0% to end the week at 1415.75. The NASDAQ outperformed both indices as investors moved money from commodities into technology and rallied 54 points or 2.2% to 2477. We would be cautious at these levels and for the short term are looking for equities to back off from current levels, thinking the recent acceleration higher in prices was too much too quick. On the Dow we expect prices to come back to 12,750 to 12,800 and the S&P for June back to 1370 to 1390. We generally just focus on US markets, but April was a notable month for some stock exchanges globally so we wanted to point them out as this trend may continue; for the month of April the Bovespa was up 11%, the Nikkei was up 11% as well as the Sensex (India) and finally the Hang Seng was up 13%. Bonds: US employment continued to fall in April for the fourth straight month, but at a much slower pace than anticipated suggesting the economy may be starting to find its footing; that is assuming you buy into these government reports. We are satisfied that these reporting results might as well be forecasted by drunks throwing darts at a board. Unfortunately, there is no possible way employment could move from 5.1% to 5.0% in the current environment. Even though the Fed delivered the seventh rate cut last week taking rates back to 2.0%, it appears the market was looking for more, not necessarily a larger cut, but perhaps a signal that they were going to pause. Sometimes it is not the rate decision as much as the conclusion of what the next move may be that affects the market. It appears the path of least resistance remains down and we will continue to suggest selling rallies in the debt market. June bonds should encounter resistance at 117’20 with support at 115. We still expect to see a challenge of 112 in coming weeks. Ten year notes for June resistance is at 115’28 with support at 114. ____________________________________________________________________ After trading above 160 just a few sessions ago, the Euro for June ended the week 188 ticks lower closing at 1.5386 last week. We have bounced off the 38.2% Fibonacci retracement assuming the lows at 1.43 in December and most recent highs. 1.5325 should serve as support for now and resistance comes in between the 9 day moving average and consolidation levels from last week at 1.5570 to 1.5630. The ECB is expected to hold rates steady at their meeting on Thursday. We still favor selling rallies in June futures as we have been recommending for the last few weeks expecting to see 150/151 in coming weeks. Month over month the dollar had its first gain on the Euro this year in April. The Bank of England much like the ECB we expect no change on rates at their meeting on Thursday. Regardless, we are still looking for the pound to trade lower. We have been sideways for the better part of 30 days, trading between 1.95 and 2.00, but we are looking to get out of that range breaking lower this week on comments from the BofE. We have exited the majority of our 195 June puts for clients and will use a lower price this week to exit the remaining positions still looking to attain our original goal of selling for $1400/contract. In order to achieve this we would need to break below 195 which we failed to do in mid April, if we fall short by the end of this week we will liquidate on Thursday or Friday in any case. The June yen ended down 78 ticks at .9523 on the week, back at levels not seen since late February just below the 100 day moving average. Although on a daily chart we are showing oversold conditions, the yen is not a buy until stocks fall out of favor as the inverse relationship continues to play out. For now the line in the sand emerges around .9470-.9525 which has served as a pivot point dating back to November of last year. On the week the Loonie lost 52 ticks closing at .9805. The trading range from .9700 to 1.02 has narrowed in recent weeks as selling has emerged closer to 1.00 with the .97 level still holding. Albeit repetitive, we still like recommend getting long close to .97 with a stop below recent lows or selling at par with stops above recent highs looking to play the range. After breaking the 50 day moving average 2 weeks ago, we have had 2 consecutive lower weeks in the Swiss franc, 2 weeks ago loosing 162 ticks and last week adding to that loss another 190 ticks, on a net basis we have lost just over 350. We have reached our target of .9450, we expect a trading range between .9400 and .9700 for the week and have no trade recommendation. The Australian dollar held up well last week even in the face of a broad commodity sell off. The June Aussie ended the week slightly higher gaining 40 ticks, ending the week at .9310. We have yet to see a settlement below the 20 day moving average since closing above this average on April 4th on a daily chart. We are getting mixed signals and prefer to buy a break, ideally still looking for an entry closer to .9150, currently the price is .9300. The RBA meets on Tuesday and is expected to hold rates steady. The dollar index traded 78 ticks higher on the week running into minor resistance at 73.70 which is followed by 74.50. Last week’s low at 72.65 on June should serve as first support. The movement this week should largely depend on flows in and out of the dollar in addition to the perception of what might be the Fed’s next move. Without having a Federal Reserve meeting for a few months, the dollar may key off the ECB and Bank of England policy decisions this week and if they give any indication of what lies in their futures. We open the opportunity of a further rally setting up a better selling opportunity as we expect at least the lows to be revisited. ____________________________________________________________________ Corn: Weekly export sales showed 551 t.m.t. of corn was sold last week, below pre-report estimates of 600-900 t.m.t. Of late, the market movement has been governed by weather and the pace of planting, which is behind schedule. Last Monday’s crop progress report put planting at 10% vs. the five year average of 35%. Coming into this week we are expecting a number closer to 30%, but anything below that should be bullish. Rains continue to fall across the Midwest keeping farmers out of the fields. This trend seems to continue as the forecast calls for more precipitation in the coming weeks. December futures have resistance at 6.32 with significant support at 6.00 although mild support comes in at 6.11. If brave enough, we suggest being outright long December, if you are mildly bullish we suggest being long December against a short July; current spread at 16 cents December over July. How to play this would be to cover the July short on a break and hold the December long looking for a new contract high. This Friday will bring the 1st WASDE release of its 08/09 corn balance sheet. If the USDA were to adjust its 154.9 February yield assumption while holding the line on use, there is a real potential for new crop carry out to fall below 500 mbu. It is likely that if a majority of the corn crop is not in the ground by mid May the yield will need to get adjusted lower and we may not get the 86 m.a. in the ground as anticipated, both are friendly. Beans: Weekly export sales showed 310 t.m.t. of beans were sold last week. Beans have been trading lower with the lack of planting progress in corn as farmers may switch acres from corn to beans. There has not been a complete breakdown for the week, November beans stayed contained within a 40 cent range on a closing basis. The play has been to own new crop against old crop as the spread of November against May or July beans has widened and may continue. November has resistance at 12.30 with support at 12.00 then 11.85. If you took our trade recommendation, long July Soy meal, you were lucky if you took a quick profit, otherwise you were most likely stopped out at a loss of approximately $800/contract. Heading into Friday’s WASDE report, 07/08 carry-out remains tighter than the USDA’s last forecast of 160 mbu. With a high likelihood of at least a few corn acres shifting to soybeans, the new crop situation looks comfortable, although, the near-term downside will likely be influenced by a potentially very tight corn picture and some talk that South American growers may not expand acreage as much as originally expected. Wheat: Weekly export sales showed 499 t.m.t. of wheat was sold last week which fell within expectations of 250-550. Overall a slower-than-normal spring, wheat planting pace has become somewhat of a concern, but this is likely to take a back seat to what appears to be prospects for a rather dramatic increase in world wheat production. On CBOT wheat for July we bounced off the 200 day moving average last week and it appears we may get a bounce, but the trend still remains down support comes in at 7.80 with resistance at 8.20. KCBOT also looks like a short covering bounce could take place as well, but much more than that is not expected; resistance at 8.73 with support at 8.30. ____________________________________________________________________ Lumber has started to move higher as we had anticipated, but it has been a bumpy road; July lumber picked up just under $12 off its lows trading just below 250. It appears we are forming a base at these levels and we would expect sideways action with a bias to the upside. The ten day forecast for central Florida is mostly warm and dry. July orange juice finished up 1.55 cents at $1.2155 on the week after trading as high as nearly 126 and as lows as 117.30. For 2008-2009, the trade is expecting a production increase as trees continue to recover from hurricanes which severely impacted the industry three years ago. If no major hurricanes hit the citrus belt, some estimates see a crop as high as 175 to 180 million. July futures are expected to continue trading in a 115 to 125 range for the time being but as time passes Florida’s hurricane season may be the determining factor in price direction, particularly if we see any supply destruction. The ICAC indicated that world production in 2008/09 could come in unchanged from this past year for cotton at 120 million bales, while world consumption is expected to rise just slightly to 123 million bales. Traders will wait for the USDA’s first look at the ‘08/09 supply and demand numbers on Friday, expecting a sharp drop in U.S. production. We are still looking for December to trade higher, but as for July it may continue to come under pressure depending on the movement of outside markets and the WASDE report on Friday. The support line for December comes in at the 200 day moving average at 75.96 with resistance just below 81.00 Sugar prices in October moved down 84 ticks on the week but pared their losses Friday closing 29 ticks off the lows. We were looking for the 100 day moving average to hold on a closing basis, but it gave way last Tuesday and what was support now becomes resistance. We maintain longs for clients but have been able to trade around the decline by selling calls and going short different contract months as to limit the bleeding. We suggest holding on, not because we feel we are married to a position, but because the funds remain net long as a new record was made according to the COT. We would not suggest adding to a loosing position but if fortunate enough to see sugar turn we would suggest adding once in a profit. July coffee prices have stair stepped lower but we are not ready to issue a trade recommendation as of yet. Since the highs in mid April, prices have come off 13 cents, but we are not sure new lows are not possible. We would recommend waiting for the May 8th forecast from Brazil’s National Commodities Supply Corp. before taking a position. Ideally we are looking to be buyers at lower levels for our clients. Cocoa prices came under pressure last week losing nearly $150 in July on dollar strength and weakness in the pound. We were looking for a $100-300 pullback back to support for a buying opportunity and the market delivered. We have not issued a buy as of yet but on a move back to 2550 this week we will most likely start to get long for clients. ____________________________________________________________________ June gold lost $32 on the week closing at $858, the lowest close since January. Current prices are just above the 50% Fibonacci retracement level assuming the record high and the lows from last summer. Assuming last week’s lows hold, we could see a bounce to $910-925 but before establishing any significant size we would like to get a clearer picture if money will continue to flow out of commodities into securities. We don’t agree with this, but as traders we must pay attention to what the market is telling us and ignore opinions even if they are our own. For a longer term play on gold we will explore selling December out of the money puts and buying a $100 call spread; for example selling the 800 put for $2340 and buying the 900/1000 bull call spread for $2740. This would give you 200 days and unless gold was to drop an additional 10% allow you a potential profit of almost $12,000 paying only $500 per strategy. This is a very aggressive play as selling options has unlimited risk so be aware before entering this trade. In less than 2 weeks July silver slipped 155 and traded near $16 ounce for the first time since late January. For now prices seem to be finding mild support around those levels; both the RSI and stochastic are bouncing off oversold levels although we would like to see a further advance before we call an interim bottom. We continue to hold onto $2 bull call spreads for our clients and have lightly advised buying December futures from these levels looking for an advance back to $18 in coming weeks. We would advise exiting December longs on a close below $16.
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. ______________________________________________________________________ |
