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The
Weekend Commodities Review
By Head Analyst
James Mound
For the Week Ending
May 4th,
2008
Energies
Turkish
air strikes into northern Iraq
helped spark a rally that has this bear in a bit of a quandary. On one hand the market remains overbought
and due for a severe correction as inflated prices due to spec buying has
built in $50 or more in excess premium (by my view). On the other hand the market sold off nearly
$10 from the highs, or roughly 8%, which has been the typical retracement level during this multi-year bull run. The next two weeks remain key to the long term outlook on the market. The bears must take control here and push
the market below $105 quickly to gain momentum and provide a true technical
trend reversal, otherwise the bulls take the reigns and who knows where this
market could go. That is not to say I
have changed my view – I have no choice but to be a bear at these absurd
levels – but the short term technical outlook did just get a bit fuzzy. Natural gas remains along for the ride with
a bearish outlook despite coming into a seasonal susceptible period.
Financials
Stocks caught a nice bid from the Fed announcement of a
quarter point cut and an outlook that suggests a stand pat attitude. After all the Fed does need to see where
these cuts have taken them and allow some lagging indicators to reinforce the
validity of their actions. However one
must question the logic of waiting until it is too late since that is what
got us in this jam in the first place.
Bonds remained almost motionless off the announcement and only seemed
to react the impressive employment report that showed a much better than
expected result on Friday.
Nevertheless the stock market is setup to fail after breaking through
a key short term bull pennant but simultaneously bumping up against some long
term trend line resistance. Bonds, inversely,
should see a bit of a rally in coming weeks as the stock market takes a bit
of a beating.
The dollar continues to rally as the Fed appears right on
its path to curb the recessionary issues at hand while simultaneously limiting
the rate cutting action ahead of fundamental confirmation. The market likes the setup and the dollar
is long overdue for a severe correction.
Likewise, the euro and pound should see continued selling. The yen is benefiting from all the
goings-on in the U.S. as its currency deflates on the idea that the carry
trade is reversing a bit. I expect the
inverse correlation to control the yen for months to come – a strong stock
market and rising interest rates in the U.S. means bearish yen.
However this will work the other way when the stock market sells off
and bonds rally, something I expect to see starting this week. The Canadian dollar is bearish but holding
above critical support just under 9700.
Wait for a break below support to get short.
Grains
Weather appears to be dominating grain prices, something common this time
of year. Rain is pushing corn prices
higher on the idea that farmers will roll into beans, thus causing a big selloff in the bean market. The reality is that a late planting in corn
did not hurt yields last year and I am not sure it is fair to assume it will
this year. The rollover in plantings
is bearish for the entire sector because it realigns a questionable acreage
report from the USDA back at the end of March. Corn did see a big drop in acreage from
last year, which was the biggest on record, but that is widely considered to
be priced into the market which is at record levels. Look for support in wheat despite a
bountiful winter harvest in Canada. Long wheat against short corn and beans (5
wheat to 2 bean and 3 corn) is a good bearish play
with an intermarket hedge.
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Meats
Cattle and hogs both followed through on bearish signals
and turned the recent bull trend into a technical reversal. Look for a continuation in weeks ahead as
the dollar strength diminishes export demand while high grain prices put
pressure on ranchers to lighten the load.
Sounds like we are about to see a lot of supply and no one to buy it.
Metals
The metals broke as expected,
shocking most gold bugs as the retracement appears
to be more like a correction. The
dollar is just beginning to rebound and the Fed’s comments on inflation set the
stage for a massive plunge in metals. Critical
support in gold is broken but a close below 850 would give the market a clear
sailing to 800. Copper is holding up
as supply concerns and a lack of inventory has the market spooked. This sets up a run to maybe 4.40 but long
term this market is a bear play along with platinum.
Softs
Coffee is dollar reactive as
buyers ahead of Brazilian harvest are seeing selling come in from producers
as the dollar rallies. The Vietnamese
export numbers are showing just how bad that harvest was as the numbers are
coming in way under last year. Buy
Sept. bull call spreads. Cocoa
is losing some steam and got rocked on the dollar rally. This market is getting overloaded with panicked
buyers running for the exits at the first sign of a reversal, plus a
secondary top here would give the market some critical momentum to test the
2000 area in short order. Cotton is
tumbling despite one of the lowest U.S.
plantings in recent history and is great value buy down here. Sugar is
getting beat up as supplies are aplenty but there is value somewhere down
here as the volatility premium gets sucked out of the calls. OJ volatility remains high on an intraday
basis as it forms a nice technical bottom that I wouldn’t trust. However it remains a good value play with seasonal
buying coming in ahead of hurricane season.
Bull call spreads are recommended.
**Chart courtesy of Gecko Software's TracknTrade
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