Weekly Market Commentary: June 23th - June 27th

What headlines are you reading? Tiger Woods winning the US Open with a fractured leg, the Celtics winning their 1st NBA championship since 1986 or, perhaps, the effects of the floods in the Midwest causing food prices to spike to record levels, or ,wait, maybe about how inflation is affecting countries worldwide.

Regardless of what you are reading, please take a moment, take a deep breath, and ask yourself if you want to be a spectator or speculator. If you want to be a part of the greatest commodity bull market perhaps in our lifetime things may need to change. I know, well at least I hope, most of you reading this already trade commodities, but what I want you all to do is ask yourself: if in fact this is a secular bull market that could last for years, do you have enough exposure in commodities?

If the answer is no, which I think for many of you it will be, review your stock portfolios, call your financial advisor, talk to your spouse, look at your allocation, and start making the necessary moves to get more exposure.

Energies

Never a dull moment. Turmoil in the Middle East, unrest in Nigeria, China subsidies, a special energy summit in Saudi Arabia; high energy prices are on everyone’s mind. That to me means we are close to an interim top; albeit prices will remain at lofty levels for years. When oil is on the front page of Barron’s, let’s face it, the easy money has been made. As we stated last week we are not comfortable advising longs or shorts here and will look for other markets to trade. If you want to be in oil we would apply the strategy we outlined last week buying bear put spreads or bull call spreads looking for a move of $10 in whatever direction you are biased. For the past 10 sessions we have been contained between 130 and 140 but when we break out of that range we could see a quick $10-15 move.

The last trading day for July heating oil and RBOB is 6/30 so if brave enough to trade here we would be looking at August. After a failed attempt at $4 early in the week, prices turned lower as August heating oil lost 4 ½ cents to close just below the 20 day moving average. It appears prices are moving lower but that will depend on what comes out of Saudi Arabia first of the week and how traders react. Support comes in at the trend line just below 3.60. August RBOB lost 2 ¼ cents last week to close just above the 9 day moving average. As long as the 3.55/3.60 area remains as resistance we should see a move down to 3.10 in the coming weeks.

We have been rooting for a retracement to get clients positioned long in natural gas, and right when it is upon us buying emerges so as traders you will need to buy intra-day breaks if you want to be long this market. Because we are overbought and have seen such a powerful advance we are not going to suggest trading futures at these levels. However, we will be looking to buy the 13/13.50 bull call spreads for $1750 o/b and the 13.50/14 spreads at $1300 o/b in August. Thursday’s outside day or bearish engulfing candle suggests we may get a pullback. On a close below the 9 day moving average for August at 12.93 expect a trade back to 12.40 which should get us these prices.

Livestock

Hopefully “buy the pullback” did not fall on deaf ears as we saw a nice week in livestock. We have been calling for this over the last few weeks and feel this could be the beginning of a much bigger move.

August live cattle closed up over 2 cents on the week at a new contract high of 104.85, helped by good demand for boxed beef and fund buying. August feeder cattle were up 5 ¼ cents on the week and closed just above the 61.8% Fibonacci retracement level. We like being long and have a first target of 115 followed by 118. After the close Friday, the USDA said that there were 10.814 million head of cattle of feed as of June 1st, down 4.1% from a year ago and less than expected. Placements in May were down 12% from a year ago while marketings were up almost 3% from a year ago. Also after the close Friday, the USDA estimated the week's beef production at 527.8 million pounds, down 1.7% from a year ago. There may be some back and fill but we expect prices to be moving higher longer term in both live and feeder cattle.

Pork production was estimated at 416.8 million pounds, up 8.1% from a year ago. August hogs closed up nearly 3 cents on Friday and 3 ½ cents on the week at 78.37. We reported last week that the tide had shifted and prices appeared to be moving higher and were pleasantly surprised by the week’s action. The only problem is that it happened so fast we did not get enough on for clients. Prices should challenge the triple top and we will react depending on if it serves as resistance just above 79.00. On a move thru as we expect look for a challenge of the contract highs at 81.10.

Financials

Stocks: Then DJIA had its lowest close since the March 10 low of 11740, ending the week down 464 points or 3.8% to 11842. After dipping below 12000 the selling intensified as investors are once again nervous and do not wish to hold onto stocks in times of uncertainty. The NASDAQ fell 48 points or 2% to 2406, with it and the Dow 16% off their most recent highs. The S&P 500 shed 42 points or 3.1% to end the week at 1317, 16% of its record high just months ago. We advised clients to be cautious and we hope they heeded our advice as we are not convinced that the bears have departed. If we get thru the contract lows on the September futures at 11770 on the Dow and 1254.80, look out below.

Bonds: Treasuries rallied last week with the yield on the 10-yr which moves opposite to prices falling to 4.136%. This is largely on the anticipation that the Fed this week will do nothing on rates. The Fed is not likely to do anything until at least August, even with mounting inflation concerns. Obviously between now and then a lot can happen that could sway the decision. As we said last week we are getting long with stops just below last weeks lows. We are currently long September 30-yr bonds for clients with a target of 114’23.0. If you want to be long futures without running a stop you could sell the 114 call against a long futures looking to collect approximately $1700.

Currencies

The September yen was virtually unchanged on the week, not wandering too far from the .9300 level. Get long on pullbacks as long as last week’s low holds at 0.9258 as it appears we are taking a breath before another leg up. If we can get some momentum or the carry trade starts working again, as we do expect equities to head south, look for a move to .9500 this week.

For now we would expect the September Loonie to stay between .9700 and .9900 and will most likely be playing that range on the long and short side with stops just above .9900 on our shorts and just below .9700 on our long entries. If the dollar is hit on Fed activity and we do not see a sell off in energies and metals this week, we may look to get a long bias; wait and see.

New data shows that the annual inflation rate in the UK has jumped to 3.3% in May which is its highest level since 1992. We want to be short the Pound but for now we will wait to sell from higher levels as it appears this currency will try to limp thru resistance. Resistance comes in at last week’s high and the consolidation zone from 3 weeks ago, but it does not look that solid and, depending on how the dollar reacts this week, we could get thru it with relative ease, so be patient.

The annual rate of euro-zone inflation came in at 3.7% in May, which is the highest level since the agency began issuing combined data in 1997. The Euro remains contained inside a 500 point range that has served as support and resistance for the better part of 2 months. MACD and stochastic on the daily support a move higher as we should get an opportunity to get short near the all-time high. Resistance comes in just above 1.5700 with the high on this contract at 1.5905. We will again start pricing out September puts; as of today the 150 is valued at $1088 and has a ton of OI.

Last week Switzerland’s Central bank left rates unchanged even in the face of soaring inflation. The Swiss Franc lost 11 ticks on the week, closing just below the 20 day moving average at .9564. We see no trade opportunity here and would prefer to be elsewhere. We favor the long side but are just not willing to put any money on the line.

For six straight days the Australian dollar has traded higher, gaining just over 2 cents, closing the week at .9435. As we have said in the 2 previous commentaries, buy the dips in the Aussie as a trade to parity is in its future. The 20 day moving average at .9390 should serve as support.

All the hype last week was the advance the dollar made and that a low was in and we were trading higher from here. Well if you are like us you may be skeptical of this assumption; usually when everyone out there is thinking the same thing or calling a bottom, it does not happen. We followed up the best week in 3 years with a loss of 112 points or 1.5%. The move this week in the dollar will largely be governed by the language that comes out of the FOMC meeting on how they view growth in the economy or lack thereof and how they intend to deal with the inflation that they have been in denial about. We expect a move down to the trend line of 72.90 in September. As we have repeatedly said, even if you are not trading the dollar follow its movement as many of the other commodities are keying of its action.

Grains

The USDA announced that the data in the June 30th acreage report was collected before much of the flooding occurred in the Midwest. Further interviews will take place in June and July so that the USDA can provide a more accurate acreage estimate in the August 12th Crop Production report.

Corn: Weekly export sales showed 343 t.m.t. of corn was sold last week. Last week we warned of profit taking and the market delivered; as of Friday we were 40 cents off the contract highs made just days before. We hope some of you used this opportunity to get repositioned and would advise any weakness this week to get long December ‘08. The June 30^th report should be extremely bullish so we are expecting funds to do some serious buying this week; if we are right we will try to ride their coattails. Weather will remain a factor but not just the floods but also the temperature. Over the next few months we are getting reports that call for a warmer and drier than normal July through August which could add further pain to the already battered corn crop. Whether it is too wet or too hot, if we have less than ideal growing conditions from here on out the yields could be reduced further which should equate to higher prices. From a technical standpoint we have no business being long corn but sometimes the fundamentals trump technicals, especially when a demand driven rally could turn into a supply and demand driven rally with further crop deterioration. No significant support emerges until 716 but it is unlikely we will see that level pre-report. We should get a push thru 8.00 on the next advance higher which would most likely attract more buyers. So traders know how serious this could be; this is the lowest rated corn crop since 1996.

Beans: Weekly export sales showed 171 t.m.t. of beans were sold last week. Beans, like corn, saw a profit taking week as November closed 57 cents off the week’s high. Poor crop condition and anticipation of fewer acres planted on the USDA due to inclement weather will keep beans supported. Anticipation of the June 30^th acreage report should take prices higher this week. We closed Friday just below the 9 day moving average and although an intra day break to 14.50 is not out of the question we think any dips will and should be bought in November beans. Even with many of the technicals saying get short, we would prefer to be cautiously long utilizing stop losses, option spreads and effectively managing your risk to stay long into the report looking for another leg higher. Resistance should emerge at around 15.50 followed by the contract high of 15.66, and then a run above 16 is likely on a breach. So traders know how serious this could be; this is the lowest rated soybean crop since 1993.

Wheat: Weekly export sales showed 538 t.m.t. of wheat was sold last week. Wheat traded higher early in the week only to back off Thursday and Friday, and for now it appears wheat is the weak sister tracking corn and beans. July CBOT wheat lost 16 ½ cents on the week and looks like it is heading lower; the 200 day moving average at 818 should support or a reversal higher in corn and beans would also help stabilize prices. July KCBOT lost 24 cents on the week and also appears like the path of least resistance is down, but a lot will depend on the direction of corn and beans. We are sellers by last week’s highs looking for prices to have trouble tracking higher. We are still looking to scalp 10-15 cents on trades and are not confident holding these shorts overnight.

Softs

Dow Jones Newswires reported that Brazil's coffee crop will be safe from freezing temperatures this week, but old crop inventories of coffee are said to be low in Brazil. September coffee closed up nearly 10 cents on the week at $1.4670, the highest close in three months on fund buying. This now puts prices above the 100 day moving average. Although prices do look like they may track higher, we will not take this trade and would prefer to look for a short entry for clients.

October sugar finished 113 ticks higher last week at 13.08, the highest close in two months, with ongoing support from high corn prices and strong ethanol demand. This has been an impressive move as prices have gained 20% in the last 2 weeks. We are up on most of our options and futures but are staying with the trade looking for much more. When we get out of the October we will be advising clients to stay long but to roll out into March and May 09’ contracts. We will try to keep a portion of our clients’ money long sugar for the next few years. We view sugar at its current price similar to corn at $2 a bushel 2 ½ years ago.

FCOJ lost just over 3 cents on the week but we started to see some buying on Friday. We are looking to get long via options and have started to price out September and November for our clients. As long as the recent lows hold from late May at 107.55 in September and 111.10 in November we like being long.

We have not spoken about lumber in a few weeks but it has done very little. As we have said in previous commentaries it appears lumber is basing out and the longer it stays in this tight range the larger move should be expected once prices get moving. September lumber gained $5.50 on the week to close at the 50 day moving average. As long as prices stay above 250 we are ok being long.

December cotton was up 59 ticks on the week in a wild week where prices traded in nearly a 6 cent range. I like the fact that we are back above the 200 day moving average but I do not like how the market rejected a trade above 84. Cotton continues to play follow the leader largely looking for guidance from other grains. Being that weather has been less than ideal and a loss in acreage should be confirmed next week we are still friendly looking for an attempt at 90 in coming weeks. We like playing this market with 10 cent call spreads purchasing for $1500 looking to liquidate for $3000.

Cocoa is trading at a 28 year high and convincingly over 3000 which is extremely impressive as I remember buying cocoa for less than half that price in ‘07. Of course our customers did not stay with that trade throughout but what if we did? I am trying to show customers how to stay with trades longer, building positions. If you are in a trade that is working and you believe it will move higher or lower why go somewhere else? September cocoa gained $121 last week but may be in need for a rest; we expect prices to trade inversely to the dollar so watch the Fed.

Metals

Gold has been higher 6 days in a row and 7 of the last 10 sessions but it has not amounted to a whole lot as prices have only moved $47 off their lows. Last week we moved $30 higher and it was a positive development to see prices close above $900 on Thursday and Friday but we would not get overly optimistic as we see the next move will largely be determined on what comes out of the Fed on Wednesday. We are not overly bullish or bearish and will most likely wait and see. As we have said in past commentaries we will buy with both hands closer to $850 on August, but until then we will lightly probe with longs using stops to manage the risk. Summer doldrums could cause gold to be range bound so do not over commit funds when there is more action elsewhere.

July silver closed above the 40 day moving average and was 82 cents higher on the week but we did not get the follow thru we were looking for after the 66 cent advance on Monday to start last week. The daily chart is supportive and it does look like a trade to $19 is more likely than a trade to $16 but that will largely be governed by what “Uncle Ben” and his boys do this week. We are expecting no change in rates and if the dollar did in fact price a rate increase in we could see some dollar selling which should be supportive. Additionally on continued talk of inflation the metals sector should benefit.

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.

Comments

[lblaine]

Well written overview!