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The
Weekend Commodities Review
By Head Analyst
James Mound
For the Week Ending
January 13th,
2008
Energies
After just barely penetrating the $100 mark crude oil has
setup a bearish pattern that could have some legs to it. While it is logical to think that $100 was
psychological and not a rational long term price top, keep in mind that much
of the last $30 run up has been lacking fundamental support. Market hysteria, fund interest and spec
buying have all helped to bring oil prices way out of proportion with supply
and demand fundamentals. So it would
seem only logical that a psychological resistance point would actually cause
a trend reversal. Look at some long
term put plays and get on the short side in a hurry. If we break back to new highs then leave
some powder dry to double up because it is not a matter of if but a matter of
when this market will go adios ga-bye-bye to the
downside.
Financials
Economic fears and a doom and gloom speech by Fed
Chairman Ben Bernanke has the stock market in a bit
of tailspin. Expect some upside this
upcoming week and a bit of rebound before heading south once again. Bonds are unlikely to break through the 120
mark and a worthwhile contrarian put play over the next couple of
months. Bernanke’s
comments along with the UK and ECB’s surprise decision to
leave rates unchanged should have rocked the dollar south. The relative stability seen following Bernanke’s comments shows that the dollar is ready to
truly bottom out and begin its run up for 2008. Get short the euro and pound. The Canadian, yen and Aussie dollar are
also solid long term short plays.
Grains
An explosive move in grains on Friday came as a bullish
reaction to the grain stocks and WASDE reports. However, if you break the report down by
market you get a bit of different view then the frenzied lock limit moves on
Friday.
Corn is definitely a shocker with a more than 20% drop in
US 07/08 ending stocks estimate by the USDA and a nearly 8%
drop in world ending stocks. This
market has been held back when compared to the moves made by beans and wheat,
mainly due to the strong planted acreage seen in the U.S. However, the
strong global demand driven by proportionately higher wheat and bean prices, has eaten away at that supply at an unexpectedly
fast rate.
Soybeans got a mildly bullish report, but when you are
running for the teens who cares about a little here
or there? There is a major shortage
and spiking demand for beans and it is justified in reacting with this kind
of bullish move.
Wheat got a bearish stocks report but a shocker in the
forecast for 2008 plantings, suggesting a long term supply in a market with
no inventory to speak of. Bottom line
is this market took a minute to figure it out, but there will be a lot to be
worried about in this market over the next 6-8 months.
So what does this all mean to my forecast for a snapback
in grain prices? It means a great
entry point! The news is out and the
prices are forcing extreme short covering.
Throw in some expanding volatility and we are very close to the
top. Long term bear put spreads offer
a solid approach for a few reasons:
1)
If the entry timing
is off you can buy back the short side at a profit. This basically gives you two chances to be
a good timer.
2)
While premiums
remain high in grain options, spreading the bear side allows you to offset
some of the excess premium with a short put option sale
3)
These are buy and hold positions.
Look at May spreads and be patient.
Go about 10-15% away from the market and wait it out. When it falls it will fall hard and fast
and you won’t get stopped out or see massive swings in the spread value –
unless of course it goes your way!
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Meats
A massive trend
reversal in cattle has the market seeing its biggest two week move in 6
months. Bottom line here is that I am
a perm-a-bear that takes one look at the technicals
and say it’s a market to buy with futures with stops below 88. Weekly trend line support and a bull
consolidation pattern says this might be another
bear fake out, but I will wait for the break below 88 to get into this market
short.
**Chart courtesy of Gecko Software's TracknTrade
Hogs remain a value
buy with calls despite forecasts for heavy supply in 2008. Demand is strong and this market is unlikely
to falter much further.
Metals
Gold surged on interest rate issues and dollar weakness,
but this is an excellent entry to a bear play in the metals. Buy puts or put spreads in gold and silver,
and if you have the chip stack look at ratio credit call spreads in
silver. Copper and platinum remain
long term shorts.
Softs
Coffee is chopping around
despite setting fresh near term highs every few days. This market is ready to explode from a
possible 2008 reversal in the Brazilian Real, a drought causing late
flowering with a setup for a bad critical crop year in Brazil, rotten crops in Vietnam and a crop hit in Kenya. Bull call
spreads are highly recommended. Cocoa remains strong as politics and supply issues make this
market set to run to 2400.
Cotton is all over the map, but
a positive reaction to the crop report gave the market a limit up move on
Friday’s close. Look for expanded
volatility next week and a run to 74 if we get a positive close on
Monday. OJ is getting clobbered after a failed frost frenzy and a flat cold storage report. Expect a rise in OJ through March and pick
up some discounted calls to play the volatility to the upside.
Sugar is catching a bid as the
European Union cuts sugar prices as they abide by the WTO ruling that their
pricing practices are illegal. This is
going to cut down future harvests dramatically as farmers do not have the
same motivation. The stocks report was
fairly bullish as well. However, the
market’s technical action this week sets up a bull trap and a bear move in
coming weeks so I would bail out on longs, take the profits and pick up some
cheap puts for a pullback. When we get
back to 1085 start scooping up some calls and take the profits on the puts.
*Disclaimer: There is risk
of loss in all commodities trading. Please consult a James Mound
Trading Group Broker before you trade for the first time. Losses can
exceed your account size and/or margin requirements. Commodities
trading can be extremely risky and is not for everyone. Some option
strategies have unlimited risk. Educate yourself on the risks and
rewards of such investing prior to trading. James Mound Trading Group,
or anyone associated with JMTG or moundreport.com, do not guarantee
profits or pre-determined loss points, and are not held monetarily
responsible for the trading losses of others (clients or otherwise).
Past results are by no means indicative of potential future returns.
Information provided are compiled by
sources believed to be reliable. JMTG or its principals assume no
responsibility for any errors or omissions as the information may not be
complete or events may have been cancelled or rescheduled. Any copy, reprint, broadcast or
distribution of this report of any kind is prohibited without the express
written consent of James Mound Trading Group LLC.
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