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The
Weekend Commodities Review
By Head Analyst
James Mound
For the Week Ending
March 2nd,
2008
General Comments
The first two months of 2008 have been two of the biggest
bull months for commodities in history.
Those that have followed my commentary and forecasts know that I have
a bearish outlook for commodity prices for 2008 as I see a turn in the dollar
and retracement in some very
overbought market sectors. Well, timing
is everything in this business and clearly the start of the year has shown me
up. However, the last time I checked a
year has 12 months in it and this massive rally gives us option traders a
great opportunity to dollar average into these markets at some wickedly high
prices. Stay long term in your trade
design I believe that the bear view for the year will pay dividends.
Energies
What happens when a market stockpiles massive supplies,
pushing inventory levels to the highest since 1994 for gasoline supplies, but
at the same time is hitting all time highs?
Simply, the market turns. Crude
oil history is riddled with times in which the market overextends through a
supply or demand shift and now is no exception. Turkey
has sent some 10,000 troops across the border to Iraq,
OPEC meets on Wednesday to potentially cut supply, and the winter weather has
been harsh of late, but all those fundamental issues are short term problems
offset by a long term supply shift.
Throughout this historic run crude has consistently set
fresh contract highs following a price retracement
only to falter within about 6-10% of the previous high. This sets a target near $108 on front month
crude, but I see it topping sooner than that.
Look for the OPEC meeting to be the catalyst for a top in the market
and jump on some bear put spreads ahead of the news.
Financials
Stocks slid on Bernanke speak of
lowering rates and general economic concerns. This market setup this move
with a consolidation pattern giving this selloff
some real potential to break this market some 50-100 points form here. Bonds
rallied on the Bernanke speak and stock decline,
but is unlikely to rocket straight through to fresh highs without seeing some
price resistance ahead of the FOMC meeting and employment data. Continue to sell put premium on dips, but
avoid biting on this rally even it means potentially missing the move as the
fundamentals and technicals do not suggest fresh
highs in the near term. We are a good
Fed meeting or two away from fresh highs from the looks of it.
The dollar is getting pummeled as Bernanke’s
warning of continued rate cuts threatens this market’s structural and
fundamental integrity. If we do not
see support this week then the dollar may break hard, putting the kibosh on
my forecasted first quarter dollar rally.
Long term this market is still likely to see a significant rally in
2008 as the U.S. interest rate policy puts it ahead of the global curve – it
may just take a bit for the powers that be to see this Fed policy as more
progressive than the E.U.’s stay pat stance. This means continuing to allocate funds to
a long term bear euro and yen outlook and take advantage of spikes in
prices. Sell into the current Canadian
dollar bounce, as tops in crude and gold are upon us and will destroy the
Canadian dollar in coming weeks.
Grains
Wow! What else can be said about
the volatility we are seeing in grains?
This sector is on fire and waaaay over
exposed to downside volatility to participate with futures. Option premiums are through the roof but
the current volatility supports the pricing and I suggest ratio back spreads
in all three of the majors. Wheat’s
lock limit down $1.35 open followed by limit up and a flat close signaled a
top in that market mid-week and the selling pressure seen later in the week
offers solid confirmation. Beans are
seeing support on acreage fears ahead of the plantings numbers at the end of
the month, but this market is very overbought and
worth a bear play at these prices.
Rice is worth a look for some straight put plays for July.
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Meats
The President of Tyson Foods
suggested at an annual NMA convention that a cycle peak for cattle has
occurred, forecasting a reduction in cattle supplies due to rising
costs. This would take this seemingly
endless consolidation pattern in cattle and setup a new pricing structure for
meats moving forward. I am not the
President of Tyson Foods, but the premise is about the only thing I have
heard that would change my perm-a-bear stance in cattle. Corn would have to turn south to change the
outlook, but I do feel corn is susceptible to a fall, thus giving a last
ditch effort to a change in the fundamental structure of this market and
collapse in prices back down to historical reality. Demand is certainly handling this price
level, but this market has stretched its rubber band a bit too long for my
tastes. Buy the hogs dip as we are approaching weekly trend line support.
**Chart
courtesy of Gecko Software's TracknTrade
Metals
Gold bugs are rolling in dough as
$1,000 gold has become a reality and $20 silver is upon us. The dollar’s collapse and mining issues
have supported this epic move that has left the market void of serious
sellers. Spec and fund buyers combined
with a market lacking in sellers gives us market hysteria. Market hysteria sets up a top, the only
question is when. The trick here is
not to be a timer but rather a put buyer in the midst of this outrageously
overbought market. Ratio back spreads
in gold could benefit from a put premium spike and offer a huge payoff with
the risk centered around playing against a
consolidation pattern at this level which is not very likely. Copper puts are also recommended. It is time to jump on the short bandwagon
in both platinum and palladium, despite the risks of two very volatile
markets without options.
Softs
Short covering in coffee has
helped sustain what is now an overbought rally. Recent forecasts for a lower than
anticipated net Vietnam
crop has also supported the recent run.
I remain a long term coffee bull with a target of at least $2, but it
is time to relinquish profitable long positions and play some puts for a 20
cent retracement.
Skyrocketing cocoa prices have
been supported by mid-day recoveries on selloffs,
suggesting there are plenty of buyers waiting to buy the dips. Buying long term puts to play to pullback
is worth a small position, but this market’s head of steam may still have
some uphill climbing left to it before giving way to profit taking.
Cotton’s run is a bit overdone
considering the rationale is acreage concerns that may not be as bad as
predicted. We are likely to see a
pullback ahead of the planting reports due at the end of the month. Wait until Thursday and scoop up some puts
on the cheap.
Sugar prices continue to gain as India’s
supplies may come in under estimates and oil prices set fresh highs. The reality is that sugar is not a bull
market, but rather one that has set a long term top and a long term bottom
and is now finding a mid-range as the market sees the light at the end of the
tunnel for unloading this huge inventory.
India
did cut its subsidy program short by 7 months and will likely cut off the
critical subsidies in October, signaling a potential top in the market near
term. Perhaps an even more important
reason for a top in sugar prices is the strength seen in indirectly inversely
correlated markets like cocoa, which incorporates sugar usage in end user
products. The extreme prices in
markets like cocoa may diminish global demand for sugar, which is holding out
some serious hopes that massive demand will be seen for sugar ethanol.
OJ is finding some price support
at value levels despite strong crop numbers coming out of Florida.
This market is flying under the radar and is ready to pop as we approach a
critical hurricane season. Look to buy
into this market ahead of the seasonal turn.
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