Weekly Market Commentary: June 9th - June 13th

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 |  Includes: AGG, DBC, DBO, DBP, FXB, FXE, FXF, GSG, OIL, SLV, USO, XLF
by: Matthew Bradbard

This past week Bernanke said the weak dollar in combination with rising commodities prices have contributed to an ”unwelcome rise” in inflation but signaled the central bank was inclined to leave rates unchanged. I bring this up because I figure if I say it enough, some will listen. In inflationary times commodities have historically been one of the best performing asset classes. If you do not already have exposure in commodities, this newsletter is not going to convince you to make them a part of your portfolio. Simply put, we give our opinions on what we expect in the short–term, sector by sector. Inflation is here for the long term and investors must start heeding the warnings. If $139 oil, a weakening dollar, and record high food prices have not made you a believer, stop reading right now.

Energies

July crude oil soared 13% in just 2 days last week to end almost $11 higher on the week and reaching new record highs. To begin the week prices came off $6 to find support around the $122 level before prices made a remarkable move as traders covered short bets and program trading kicked in to add to the momentum. As we have been very clear in recent weeks, the trend is still up and trying to play oil from the short side, trading without stops, or attempting to trade oil with an undercapitalized account could be extremely painful. On daily charts technicals support a move to higher ground. Aggressive traders continue to play from the long side utilizing stops. We should see support first at $135 followed by $133 as prices may make a run at $150.

Trading distillates is not for the faint of heart; as we wrote last week, we were doubtful the highs were in but we certainly did not forecast we would be back to them or through them in such fashion. After trading 50 cents lower in just about 2 weeks prices in heating oil are back near $4/gallon aided by an advance of 42 cents in just 2 sessions. We closed Friday within 6 cents of the contract high and we are likely to see a new high made this week. The move in RBOB was almost as impressive as prices for July moved from 3.17/gallon just Thursday to end the week at a new contract high of 3.55 gaining almost 40 cents. This is at the same time as gasoline demand dropped by almost 4% from the same period last year. Volatility of this nature is reminiscent of moves we recently saw in rice and wheat, and we would caution investors to trade unless they are well funded and can emotionally and financially handle this rollercoaster.

Natural gas prices have traded higher 6 days in a row and the fact that the energy sector as a whole is on fire, strength may continue. We have yet to see a pullback deep enough that we felt a long entry was worth the risk for our customers. We continue to monitor 50 cent bull spreads, and if we are not exposed long for customers by this week, we will most likely start pricing out August options as the July options are running out of time. The support trend line comes in for July just below $11.80 and with prices just about $1 above that level we still wait for a correction. Being that prices are starting to show signs of being over bought the sidelines may be a good place to be waiting for prices to retreat and allow clients in with a more favorable long entry. The restart of Independence hub, a major Gulf gas output platform, may also assist in prices coming off.

Livestock

South Korea and the U.S. remain at an impasse over how to proceed forward with beef trade. South Korea, under pressure from consumer groups at home, said they only want beef from cows that are 30 months or younger. The U.S. government wants them to accept all beef. Five major U.S. meat producers have said they will voluntarily put the age on labels and let South Korea decide, but the issue is not yet resolved. After the close Friday the USDA estimated the week's beef production at 525.0 million pounds, down 1.8% from a year ago. As we have voiced in previous weeks, we are expecting a significant move up in the price of feeder and live cattle but for now prices may come off. As we alluded to last week if we get a break, use it as an opportunity to position long. August live cattle remained range bound between 99.50 and 101.50 last week, and although we do not have clients positioned short we expect to see prices come off a little. August feeder cattle prices lost just over 3 cents last week finding support at the 38.2% Fibonacci retracement level. We are looking for a long entry closer to the 50 day moving average at 110.00 for our clients.

Pork production was estimated at 424.4 million pounds, up 10.8% from a year ago. We currently have clients positioned long August lean hogs. From Monday’s open lean hogs lost 2 1/4 cents on the week. We may get a little more of a correction, but we will be advising longs, expecting there to be support between 75.50 and 76.00. It is entirely possible to get a trade down to 74.00 without us abandoning our longs as we are looking for much higher pork prices in the weeks to come. The weak US economy is driving consumers to switch from eating high priced beef to lower priced pork. Also demand in China for pork has skyrocketed resulting from the recent earthquake and increased demand ahead of the Olympics.

Financials

Stocks: Friday’s almost 400 point drop in the Dow was the biggest one day drop since February 27, 2007. On the week the DJIA lost 429 points or 3.4% to 12210. The S&P suffered its second loss in three weeks and slipped 40 points or 2.8% to 1361. If we were to get a close below 1350 this would reinforce fears that stocks are heading lower to potentially new lows but at least a challenge of the lows in March 100 point from current levels. The NASDAQ gave up 48 points or 1.9% to 2475. We would suggest continuing to be defensive as more shoes could drop. As a side note the vix has moved nearly 50% in the past 3 weeks advancing 4 plus points on Friday alone.

Bonds: The U.S. Labor Department said that the unemployment rate shot up from 5.0% to 5.5% in May, the highest since October of 2004 and the largest month over month rise since 1986. Non-farm payrolls were down 49,000 in May, registering a loss for the fifth month in a row. Prior to these reports fed-funds futures were pricing in as much as an 80% chance of a hike of 25 basis points at the Fed’s meeting in October. After the data was released futures were projecting closer to a 56% chance. Recently the Fed has shifted its focus on inflation and without further developments the rate at 2.0% will be the low water mark. We expect June bonds to stay contained within the same channel we spoke of last week, between 113’16-116’16; for June notes resistance comes in at 116’04 and support at 113’25.

Currencies

Statistics Canada said that the unemployment rate remained at 6.1% in May with a net gain of 8,400 jobs, slightly less than expected. As opposed to the US which is losing jobs, in Canada more jobs are being created. As we said last week, we were looking for the Loonie to continue moving south looking for a trade below.9850 and with the weeks low at .9781; mission accomplished. From oversold levels and being that energy and metal prices appear to be moving higher, we would favor a light long with stops just below last weeks low. Be aware the Bank of Canada is expected to cut rates ¼ point to 2.75% on Tuesday.

The BoE left rates unchanged at 5.0%, but a rally in the Euro sent the dollar lower, pushing the pound higher helping it pare losses from earlier in the week ending only 34 ticks lower. We closed just above the 100 day moving average and on a trade higher with the Euro we will be looking for an entry to get short. Resistance should come in at 1.9800 followed by 1.9900.

The ECB president, Trichet, affirmed his ongoing concerns of containing inflation, before stimulating the economy with a rate cut. His hawkish tone suggested that the ECB would consider a rate hike if inflation were to increase. Traders covered shorts and buyers drove the price higher buying Euros and selling dollars helping the Euro gain 4 cents off the lows and finishing the week 2 cents higher just below the consolidation area from 2 weeks ago that should serve as resistance. On a close above 1.5800 look for a challenge of 1.600 for June; if we fail at that level look for a trade back to 1.5550.

We were unclear on the next direction for the Swissie last week, so we recommended a position on the sidelines. We were absent for the sideways trading that occupied most of the week but we also missed a trade above .9800 which, if we see some follow thru early next week, should indicate a move to at least 1.0000. If the move north looks likely traders should be able to put stops just below .9700 and let the trade work, trailing their stop loss on advances.

Not unlike the BoE and ECB, the RBA left rates unchanged last week, the difference being their rates are at 7.25%. With such a favorable interest rate differential par seems likely in their currency as we have voiced for months now. The Australian dollar continues to dance along the 20 day moving average; it was tough for this currency to pullback last week as we had anticipated especially being that it moves off commodities and we had a lot of positives commodity wide last week. We would still advise buying dips here but we have changed our entry to just below .9500 as opposed to .9300.

For months now the Japanese yen has had an inverse relationship to stocks, so being that stocks sold off so violently last week and the yen did not react positively, things may be changing . That being said, for now we would steer clear of being long or short until we get a clearer signal. We should find support at last weeks low just below .9400 while resistance comes in at .9600. Be aware the Bank of Japan is expected to keep rates at 0.5% on Thursday.

The dollar index for June ran into resistance at the top of the Bollinger bands, just falling short of trading at 74.00 on June. Early last week we heard positive comments from Bernanke that helped the dollar advance; mid-week Trichet’s comments on inflation and the direction the ECB tuned the dollar lower as dollar bears smelled blood in the waters and selling intensified. If we garner more momentum we could see new lows, but we would expect the recent trading range between 71.50 and 74.00 to hold until the FOMC meeting at the end of the month. As we have said, follow the dollar not so much to trade but to aid in entry and exit on other markets.

Grains

The USDA has its monthly crop report out Tuesday ahead of the opening.

Corn: Now we should be paying attention to crop ratings as opposed to plantings as nearly the entire corn crop that will be planted is in the ground. In its first report for this crop the USDA placed the good to excellent rating for corn at 63%. This was somewhat higher than trade expectations given the overall wet and somewhat cool early growing conditions. Still with too much rain in the Midwest this spring many believe that the USDA will have to reduce its corn crop estimate on Tuesday. Weekly export sales showed 530 t.m.t. of corn was sold last week. The weather remains wet and as one grain analyst said last week, you needed scuba gear to go out and ride in the fields with a tractor. Based on last weeks planting report it appears we will get 5-6 m.a. less planted than was originally anticipated; that in combination with less than trend line yields should mean higher prices. With any further problems to this crop especially in July to mid-August, price rationing will have to occur to insure we do not feed, use and or export the corn crop to dwindle our stocks further. December corn traded as high as 690’4 on Friday at a new record high. We will be advising to stay long December corn and to enter on pullbacks still looking for a print above $7 before July 4th. The spread we have been trading for clients is now above 30 cents and we have started to lighten up but will look for a re-entry still looking for 50 cents. (December08/Decmeber10)

Beans: Weekly export sales showed 298 t.m.t. of beans were sold last week. Currently the strike in Argentina has no end in sight, so buyers will come to the US market. Tuesday’s USDA crop report should show lower ending stocks for beans on better exports thanks to Argentina’s ongoing strike. Monday’s crop progress report will continue to show a record wet spring and has bean acres unplanted especially in the western grain belt and replanting of flooded low lands on hold indefinitely. Soybean condition reports should be released in a week or two. A wet and cool spring is a normal occurrence in a La Nina weather pattern for North America. This same weather pattern increases the odds of a dry and warm summer, especially for the western Corn Belt states. For soybeans, August weather is extremely critical as the plants flower and set pods in early to mid August. November beans have minor support at 14.32 followed by 13.75 with resistance not until the contract high at 14.73.

Wheat: Weekly export sales showed 140 t.m.t. old crop sales and 97 new crop. Both KCBOT and CBOT were able to rally from oversold levels as sellers could not find anymore bearish news than the world record crop this year that has pressured prices for the last several months. Higher feed grains had traders covering shorts and strength in outside markets may have contributed as energies and metals raced higher. If July KCBOT wheat were to close over 8.50, we could see a trade to 9.00 but we do not anticipate much more. A gap was formed on Friday of last week so on a pullback expect that to get filled taking prices back to 8.15. CBOT July wheat has resistance just above 8.40; on a close above that level we could see a swift move to the 61.8% Fibonacci level at 9.40. On any signs of weakness in other grains we will be advising clients to get short anticipating a move back below 7.50.

Softs

October sugar was down .41 to 11.05 but a bottom is yet to be determined. We remain long with clients and continue to accumulate long options and futures holding for what we anticipate to be much higher prices. We have not gone heavy yet because we have seen many head fakes where we had previously thought a low was in place. Higher energy prices help keep ethanol demand strong and higher corn prices make sugar ethanol even more attractive. Markets tend to overextend themselves and we feel that is what has happened in the sugar market currently looking for a reversal to take us to 14 cents quickly and ultimately rolling out into longer dated contracts looking for 20 plus cents.

Last week July cocoa closed up $136 at $2,878, the highest close in over two months, helped by the weak dollar and several unknowns about the size and condition of the current cocoa crop in West Africa. Furthermore, Reuters news reported that cocoa arrivals in the Ivory Coast were less than expected in the last week of May. We should find solid support at 2700 with resistance at the contract high reached back in mid-March at 2983.

September orange juice ended up 8 cents at $1.1950, helped by bargain hunting early in the hurricane season and a weaker dollar. Another reason why prices rebounded last week is because fcoj is fairly priced, based on the current supply and demand. Additionally, if you compare fcoj prices to other grains, softs, metals and energies, it really has not participated in the recent appreciation and may need to play catch up. This recent bounce allowed us to get out of our clients September options at 100% profit, and we will look to reposition long again on a set back potentially in options and futures.

December cotton has come down more than we had anticipated of late but it appears that we are carving out a bottom, and we may start to see the move higher that we had anticipated as weather premium should be built in. Also, we expect farmers to be planting less cotton and more profitable crops like corn, wheat and beans. Cotton is oversold on the daily chart and if last weeks low in December holds at 71.65 we will start accumulating more longs for clients. We are advising December futures as well as bullish option plays; for exact strategies contact us. A close back above the 200 day moving average at 76.80 should be a confirmation that the interim lows are in.

Although we feel coffee prices are heading lower, we are getting conflicting reports from news services and traders, so we would suggest trading elsewhere for now. Moreover, there is no clear trend as prices have been confined in about a 10 cent trading range for the better part of 3 months. On a close above 145 in July if that was to happen we would have to re-evaluate being on the sidelines and likely want to get positioned long, but until then or something changes, there are far better opportunities elsewhere.

Metals

August gold traded $8.70 higher on the week, but the real story was the trading range which on the week was almost $38. Gold will look for direction from the dollar and energies. Both the stochastic and MACD support a move higher on the daily chart as prices look like they could add to last week and trade to at least the $930 before running into resistance. We do not expect to see substantial upside ahead of the fed meeting, but we are OK starting to build a long position in $50 -$100 bull call spreads out to October and December as we see a lot of potential the second half of the year. We will advise exact strikes and timing in coming weeks, but this trade should be on your radar.

Silver was able to hold the 50% Fibonacci level we have made reference to in recent reports that comes in around $16.50 in July. Fridays close was above the 40 day moving average as we gained 55 cents on the week making our way to next resistance at the 61.8% Fibonacci retracement at $17.70. On a close above that level we should challenge the recent consolidation level from 2 weeks ago at $18.40. At that time we would tighten up stops on July futures and look for an exit for your July calls as there is only 3 weeks time until expiration. You should start moving out to September and December with your options and over the next few weeks as well in the futures.

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.