Today in Commodities: Inflection Point

We got clients out of their oil longs and are still long natural gas so in terms of the energy market today we felt like buffoons. The good news is we’re not day traders and when we advised clients to get out of oil, it was to lighten their exposure and we suggested to get out at a slight profit. Clients we bought natural gas yesterday may question the timing, but we are expecting prices to appreciate in the next 60-90 days not 60-90 minutes.

To clarify, we see no significant macro-economic changes in the immediate future so we’re not calling the bottom in the US dollar but rather a 2-5% bounce. I feel that I need to defend this call and I refuse to do so. If you disagree take the other side of the trade, that’s what makes a market.

No one liked my corn trade either. December corn was higher by 6% today and we expect yesterday's low to serve as the contract low. Prices closed above the 9 day moving average today, $3.50-3.70 is our initial target window.

We expect gold and silver to move higher but we are not suggesting all in. Again to clarify we had advised investors to lighten up on their metals and energies positions and the next day we told you to hold. This is not to confuse you; I only listen to what the markets tell me.

The stock market is higher by 26 points in the S&P and 220 points in the Dow as of this post. Trade out of all your remaining September longs by the weekend. Treasuries are lower, our favored play for clients remains shorting Euro-dollars which are down 15-20 ticks today at $25 per tick.

Cocoa was higher by 4% today, clients gave back all their profits from yesterday, stay in the trade for now. December coffee was higher by 3.7% today. We advised clients to put in profit limits today and make them GTC.

Lumber was up the daily limit, did anyone see our commentary from Monday on lumber? We are open to suggestions but the charts looks like a buy.

Comments

[Duude:]

Telling it like it is really sucks sometimes.

Jul 23 04:43 PM

[Larry House:]

Your piece today illustrates why I follow your posts. Keep up the good work.

Jul 23 04:49 PM

[Mad Hedge F...:]

This could be it. There is no doubt that the next trade from here in stocks is a sell. Buying NASDAQ on a 12th consecutive up day, the S&P 500 on the back of a 110 point move, and the Dow on top of a 1,000 point pop is not what great fortunes are made of. After stopping out of my own shorts in the 880’s, I have been holding back, holding back, holding back. See my warning not to sell too soon at www.madhedgefundtrader.... I have never been one to fight the tape. The only trader who is always right is Mr. Market. The earnings to support a full fledged bull market are not just there. Deleveraging worlds don’t support expanding earnings multiples. It all works for me because the more it goes up now, the bigger the fall later. Even the raging bulls are warning about a “W” shaped recession and another market dive in 2010. How finely do you want to trade this thing? It’s clear the big core shorts at the major hedge funds haven’t budged, and that most of the recent low volume action has come from day traders, momentum players and CTA’s. All we need now is for mom and pop to come in and ring the bell at the top. Is 2009 going to be replay of 2008? Is a “Sell in May and go Away” at www.madhedgefundtrader... to be followed by another October crash? If your friends’ long positions make money from here, just revel in their good fortune, and let them pick up the dinner check.

Jul 23 06:34 PM

[HardwoodFlo...:]

Wow- Lumber there are about 4 guys in that pit onthe CME. Most lumber doesn't move on the CME. One goodpoint about Lumber is that it is below raw material costs. The harder part is knowing true inventory numbers. There have been huge mill shut downs in North America but demand is still weak as is evidence by the price.

I guess the point is what makes people think they can bet on the price of commodities when they know solittle about them?

It's like oil? What makes people think they are qualified to bet on oil? What do they think they know? Futures are a zero sum game- some one loses someone wins- just like roulette.

Here's a thought: Is the SOR a reserve or a drain? I mean it was never used to sway the price of oil was it? What would the government want to do by manipulating the price of oil. Not help maintain political stability in places llike Russia or Saudi? They wouldn't do that.


There is just absurdity in many claims that propagate what people want to have happen in the market. These claims would move a market that is readily movable based on the low margin requirements 10%. I've been advocating moving the margin requirements to 30% mainly to watch the cockroaches run for the exits.

Here are some of the wild claims by "investors" talking their book:

1)world wide demand- Europe, Japan and the US represent 70% of demand. In order for the other 30% to move the needle would take serious escalations in demand all predicated on infrastructure improvements, economic stability and major economic growth. This would take generations to happen.

2)Chaos theory- Something someday will happen. Be it a hurricane, a war, some puny dictator saber rattling, a refinery fire or cold weather in Antarctica. Some basis for investing.

3)Driving "seasons"- there is a summer driving season, a winter holiday driving season, a labor day, memorial day, a thanksgiving driving season. sounds like it's pretty much all the time. Also, doesn't this "theory" fly in the face of the "global demand" story. If indeed it's global demand then what will a few extra miles in an ordinary weekend matter.

The best article I ever saw was written by two guys from Stanford who did an analysis that World Wide oil could be controlled with just $11Bln. Hum, so a market that has the power to destroy our GDP and economy can be controlled with just $11BLn. Now, I know we are all altruistic investors but what if some people got together and decided that they would sell the dollar short bid oil up and short the dow on the basis of the negative feedback loop would raise input costs to producers creating a margin squeeze then they would have to raise prices to consumers- thus killing the consumer.

Unless you are Soros you are the dumb money.

Jul 23 06:55 PM

[Barbarous R...:]

Why should natural gas perform well in the next 60-90 days? That puts us into the fall, when U.S. gas storage is very likely to be full.

Any rally in natural gas in the near term, not accompanied by a rise in the oil price, is likely to attract LNG volumes -- the U.S. gas price is already at a slight premium to the U.K. natural gas price.

Jul 23 09:18 PM

[RiskReturnO...:]

If DBA can stay above current support level, then expect a good chance of rebound to $28. Risk-reward tradeoff is very good -- $4 upside vs. $1 downside is support broken.

Jul 23 10:51 PM

[Belome:]

The commodities got a bounce today from the dollar and our new found prosperity in the equities. Please use this opportunity to short to your desired taste. The dollar will bounce the equities will get hit and "Down goes Frazier". I'm getting long Rosetta Stone because we may all need to speak a different language to get a job or get decent health care or carry a gun or..........

Jul 24 12:44 AM

[Maxe Paul:]

Your gonna keep spruiking this Nat Gas play until it pays! You had your moment in the sun last week i think, back to the nuclear winter on this one.

Jul 24 09:15 AM

[djj420:]

No need to pick stocks for this strategy. Buy index ETF's like IYM, XLB, IGE, MOO, etc.


On Jul 24 11:07 AM 太阳黑子Sunspot wrote:

> For those who prefer stock than commodities, which producer stock(s)
> would you recommend?

Jul 24 12:39 PM