With the 2008 Summer Olympics now behind us, China is back from vacation. Look for buying to emerge on commodities as we have seen prices come off 25 plus percent on select metals, energies, and agriculture.
We maintain our conviction on the secular bull market and that over the long haul we will be scaling into longs on dips. Historically bull markets in commodities have lasted 18 years and we are in year 8 so NO we don’t think the show is even close to being over.
My birthday is on Saturday, August 30th; for my present I would like all readers to start taking commodities more seriously as an asset class using the most recent correction to gain more exposures in their portfolio. Although in the short term it may appear like a gift to me, 2-3 years from now you should be rewarded if you are disciplined.
Stocks: Federal Reserve Chairman Bernanke told a symposium at Jackson Hole, Wyoming that the current financial storm "has not yet subsided," but the "FOMC is committed to achieving medium term price stability and will act as necessary to attain that objective." That is all well and good, but will it be too little too late as the PPI last week came in at a 27 year high? Economists say it is a lagging indicator and prices of commodities have started to back off which is apparent, but what happens when prices start advancing again, which we ultimately think is the case. We cannot make a bullish case for stocks in this environment at all. The Dow ended last week down 32 points or 0.3% to 11628. The S&P 500 gave up 6 points or 0.5% to 1292. The NASDAQ ended its 5 week winning streak to lose 38 points or 1.5% to 2415. September/October has witnessed some of the worst stock market declines in history. Resistance in the September Dow is at 11725 followed by 11850 with support 11440 followed by 11300. The S&P finds resistance at 1310 with support at 1267 followed by 1255.
Bonds: The flight to safety bid in Treasuries lives on as the global uncertainties have not abated and no quick end looks in order. From over bought levels the trend remains up and if we see equities get hit this week, we should push thru last week’s resistance and make our way to higher ground. We won’t be involved and we are still shopping for a short entry. As far as we are concerned, the higher prices we are able to sell from, the better. Support on 10-yr notes comes in at 115’25 with resistance at last week’s high at 116’27.5. September 30-yr bonds should find support at 117 with resistance at last week’s high at 118’09.5. On a breach of resistance levels on the upside we may attempt a run to the contract highs in March.
The Euro was higher 1 cent last week after 5 losing weeks closing at 1.4758. We would have expected to see more of a bounce after such a dramatic sell off and the fact that we haven’t expresses how much perceived weakness is reflected in the Euro economy and in turn their currency. We are still looking for a rally to re-establish shorts for our clients. Support comes in at 1.4650 with resistance at 1.49 followed by 1.50.
The UK economy moved a step closer to recession last week after official data showed growth unexpectedly ground to a standstill in the second quarter of this year, the weakest performance since the early 1990s. The Pound reacted losing 1.24 cents and closing below 1.8500 for the first time since July of 06’. The trend remains down, but we would need to see a rally to get clients short again, ideally we could see a trade back to 1.90 before establishing shorts. Resistance for now comes in at 1.87 with support at, nope there is no support, so don’t try to be a hero and pick a bottom.
Higher gas prices pushed Canada's annual inflation rate to 3.4% in July, its highest level in more than 5 years. As we voiced last week, if we were to get some support from the commodities; i.e. metals and energies look to get an advance in the Loonie and that is exactly what we saw as prices advanced just over 1 cent last week. We had a long trade recommendation last week, but have yet to reach our target of .9650. Buy dips as we still expect a trade higher after a pullback early this week.
The Japanese yen continues to react inversely to the stock market and although we do not agree with the recent path of securities, it will allow us a better entry to get long the yen. Last week the September contract was up 41 ticks, but we had expected more. We will start to work long this week via futures and options looking for the selling to abate and for the yen to see a steady crawl higher in the weeks to come. .9000 should serve as solid support and as we have said in previous weeks, once we get moving we are looking for a quick 400 plus point move higher.
There remains no reason to trade the Swiss franc as it remains largely range bound. Last week prices lost 14 ticks as we now have had 6 losing weeks in a row where this currency has lost 9% against the greenback. We should find support at .9050, but we don’t expect much more than a sideways market so look else where.
For a lot of volatility the Ausssie only finished up 10 ticks on the week, the important part was that it was up as prices have lost 11% in the last 5 weeks. We are still shopping for an entry to get long for our customers and if we see a capitulation low trade below .8500 this week that could be our entry point. It is still too early to get in December because of the lack of interest, but that will change over the next few weeks. September has moderate support at .8550 with resistance at .8750.
The US dollar index, which has rallied about 8% over the last four weeks, is nothing more than a bear market rally. Last week we failed at new highs and the dollar is showing signs of turning back down again. The dollar’s recent rise should be viewed as euro and sterling weakness rather than dollar strength. Looking at dollar fundamentals, we see nothing but difficulty ahead for the US dollar, because of the massive amount of money that has to be printed to pay for all these bailouts, the government and the Fed are committing to the deteriorating Federal and State budgets, not to mention the trade deficit that shows no sign of reversing itself.
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.