MB Wealth's Weekly Commentary 1-888-920-9997
Energies Livestock Financials Currencies Grains Softs Metals
For August 4th–August 8th 2008
By: Matthew Bradbard Commodity investors were probably just as happy to see July end as equity investors were to see the end of June. During the month, the CRB Commodities Index recorded a decline of 10.0%, which is the worst monthly decline since March 1980 (10.5%) and the second worst ever. The commodity markets have produced some sharp sell offs, and given all the attention that commodities have drawn over the last several months, it is not surprising to see a steep correction. Traders that have been riding the bull for the last 8 years may have given back some profits, but recent late comers to the commodity bull run may have gotten stung the worst. Anyone new to commodities needs to be prepared for the large swings, we would advise using a broker for help with entry and exit and to advise on risk management. Because of the leverage, large monetary swings can happen in a relatively short time frame. This does not mean the move higher is over for good, it simply means this correction can be quite deep before the trend reverses back higher once again. To find out exactly how we are positioning our clients in commodity futures and options, Contact us today at 1-888-920-9997. ____________________________________________________________________ After 2 weeks of oil moving lower, we managed to stay positive last week with September gaining $1.69 closing above the 100 day moving average. For now prices should be supported between $120/122 with the stochastic and MACD indicating an oversold condition, the downward momentum appears to be exhausted. It appears the psychology has shifted and instead of dips being bought rallies are being sold. Needless to say, on a bounce higher resistance comes in at $128.75 followed by $131.75. Prices may continue to move lower but not at such a feverish pace; a sharp decline in demand, growing gasoline stocks, rising inflation in Asia, and easing worries about Iran have all contributed. The immediate direction could be determined by what comes out of Iran and the status of their nuclear program. September heating oil shed nearly 12 cents last week as prices were down for the third week in a row. We see no significant support until $3.32 and with the day to day swings we see no reason to trade short or long, 4 out of 5 days last week had greater than a 10 cent range. If there was any glimmer of hope last week in the energy complex, September RBOB was up 6 cents on the week to finish at $3.1044 just below the 100 day moving average. If last week’s low of $2.9833 holds up we may get a bounce of 10-20 cents. It appears for now the $3.00 level, albeit an emotional level, may act as good support. We continue to tell speculators and hedgers to monitor crude to help determine direction with the distillates. After 3 weeks of vicious selling we may be forming an interim low in natural gas as September was able to trade positively last week, even if only increasing a modest 13 cents. We are advising clients to get long November futures with stops below last week’s low. In addition, the October 9.50/10.00 call spread looks attractive if bought between $1600-1700, Friday’s settlement was $1920. On a dollar advance in the futures within the next 2 weeks you should be able to liquidate for upwards of $3500. If trading the futures look to add to the position on the way up as well as trail a stop loss order. ___________________________________________________________________ We recently published an article that outlines why we feel being long livestock is an excellent place to be positioned with a portion of your commodity portfolio. http://mbwealth.com/articles/cows&pigs.pdf Last week the USDA estimated the week's beef production at 513.7 million pounds, down 2.0% from a year ago. October feeder cattle jumped up 595 points last week to a new contract high of 118.65 helped by lower corn prices and good beef demand. We maintain being long for clients and will be adding to them recommending new entries that aren’t on board yet in order to get situated in cattle, looking for higher prices. October live cattle were also higher on the week as prices picked up 330 points, Friday we got a close above the 20 day moving average for the first time since July 7th. We are advising clients to be long here as well with support at 107.75 and next resistance at 110.80; the 50% Fibonacci retracement line. In the coming weeks we are expecting the highs from June at 115.25 to be challenged. Whether it is via futures or options do not miss this move as we expect both feeder and live cattle prices to make a significant move higher. Pork production was estimated at 411.1 million pounds, up 5.7% from a year ago. October lean hogs were higher 67 points on the week trading at their highest level since June 24. We have now broken out of the trading range from the previous 3 weeks and we should make or way to higher ground. We have clients positioned out right long October in futures and options, we have put in limits to get out of our call options but will most likely stay with the futures. Additionally, the spread we recommended last week; long October short August has started to move against us and we will most likely look for an exit this week either by cutting our loses or legging out as August in the short run may gain on October. ____________________________________________________________________ Stocks: The Dow fell 44 points for the week or 0.4% to 11326. 11450 should serve as moderate resistance unless the market hears some positive news out of the Fed, which is possible, but the Fed would need to be extremely creative to put a positive spin on the current conditions. Support comes in near the lows of last week at 11140. The S&P added 3 points or 0.2% to hang onto 1260. Resistance comes in at 1270 with support at 1245 followed by 1235. Last week the NASDAQ was flat at 2311. For this week we would look for more sideways action. We disagree with Jim Cramer and don’t feel that the lows have been forged. We would advise clients to use rallies as an exit door to diversify out of stocks and to get a larger cash position looking to buy stocks back at a lower price or to diversify into other asset classes. The debate on whether we are in a recession or not at this point we feel is academic, because it sure feels like a recession. Bonds: The U.S. Labor Department said that the unemployment rate increased from 5.5% to 5.7% in July with a net loss of 51,000 jobs, not as bad as expected. It is the highest unemployment rate since March of 2004. Although we expect no change in rates, the language could give an indication of what is to come and could be a market mover. As we said last week, we have a bullish bias but currently no exposure for clients. We still expect notes and bonds to track higher, but are not interested at this point. September bonds have resistance at 117’10 with support at 114’20. September notes have resistance at 116’00 and support at 113’20. We remain short euro-dollars for clients looking for an exit this week if prices back off. ____________________________________________________________________ An index of manufacturing in Australia slipped from 47.0 to 46.9 in July, a sign of contraction for the second consecutive month. As we warned last week the Aussie dollar could be hit particularly hard on any sign of dollar strength; the September Aussie lost 2 ½ cents last week to close at its lowest level since mid June. September should find support about 1 penny lower at .9150, if we even get to that level before prices start heading north again. Resistance comes in around .9350. We are still expecting parity at some point down the road so we will be looking to get clients long once a bottom is established on this recent correction. The Swiss franc continues to weaken as last week was the third consecutive week to trade lower with September loosing 125 ticks. We see support at last week’s low of .9508 followed by .9440. Our recent targets on our shorts have been reached and for now we will be positioned on the sidelines with a bullish bias for the week. Business and consumer confidence weakened sharply last month in Europe and on a month over month basis had its largest monthly decline since October 01’. Last week we forecasted a high of 1.5750 and a low of 1.5500 and the actual range was 1.5720 and 1.5478. On the week, prices were off 153 ticks as prices closed just above the 61.8% Fibonacci retracement level. As long as last week’s lows hold we could see a modest rally with resistance coming in at 1.5595 followed by 1.5688. We don’t expect to see any change in rates from the ECB on Thursday as there are further signs of economic weakness that outweigh the inflation outlook. Although at last week’s low we were 10 ticks below the low from mid June, we feel that if that level holds we could see a significant base form. We are advising clients to be lightly long via futures and will be adding in length when the market proves that an interim bottom has formed. Assuming last week’s low of .9248 holds, we are expecting a move up to .9600 - .9700 in coming weeks. The fact that inflation grew at its fastest pace in 15 years in June, it is plausible that Japan will need to raise rates from the anemic 0.50% level in the future, which would be supportive to their currency as traders may further unwind the carry trade if they felt rates were going higher. The UK economic outlook darkened further last week as retail sales growth and home mortgage activity slowed sharply. Last week the September British pound lost 155 ticks on the week to close under the 9 day moving average. Resistance comes in at 1.9740 with support at 1.9636 followed by 1.9530. We would expect the highs from 3 weeks ago just above 2.00 to serve as solid resistance and for a grind lower in prices over the next few weeks. We will be advising clients to sell rallies still thinking that the cable is one of the most over valued currencies. We don’t expect any action to be taken on rates at the Bank of England meeting this week. The Canadian dollar has been down for 9 days in a row and has lost almost 300 points in that time frame. For now support comes in just below .9700, but if that level was to give way we could see a precipitous fall to .9600. If we were to rally from oversold levels we do not see any resistance until .9825. At this point if you are not already short with a lead we would recommend a position on the sidelines looking for a new entry. The dollar index was up 54 ticks last week trading at its highest level since June 23rd putting us back above the 100 day moving average. As we said last week we would recommend establishing shorts between 73.50- 74.00 as we don’t see these levels maintainable in the current environment. We have yet to get clients shorts and will be anxiously waiting for any action or change in verbiage at the FOMC meeting this week. We don’t expect any change in rates and see rates at 2.0% for the next few months. We are paying very close attention to the direction of the dollar not, so much for a trade, but for guidance for other commodities that are keying of the dollar. ____________________________________________________________________ Corn: Weekly export sales showed 825 t.m.t. of corn was sold for new crop. This is a relatively strong number and shows importers are getting aggressive again, buying as prices have come off almost 30% in the last 5 weeks. We rallied the early part of last week on news a heat dome was coming into the Midwest grain belt, but late in the week prices fell as forecasters built rain into this week and the heat dome moving out. Corn is pollinating and on any adverse weather during this portion of the plant’s reproduction cycle can crimp crop yield. If we come in to start the week lower on weather, we would recommend buying as we feel the low from 2 weeks ago at $5.62 3/4 and the 200 day moving average will serve as solid support and we want to be long into the August 12th USDA crop report. We have accumulated December 08’ call options as well as long futures for clients. For protection, when it appears we are going to see some pressure we are advising clients to sell March 09’ against their longs ultimately looking to lift them at lower levels and be net long into the report. For day to day action it is all about the weather and we have had very little success day trading with current volatility. We still maintain that on a resurgence of the uptrend we will make a run at filling the gap from one month ago at $7.47 on December 08’. Beans: Weekly export sales showed 271 t.m.t. of beans were sold last week. Additionally, new crop year sales after September 1st were 436 t.m.t. as the US becomes the primary port of origin for beans as South American crop seasonal sales are largely over. Like corn, beans too are trading off the day to day changing weather. On excessive heat, during the critical pod filling phase of bean development, or excessive rainfall; either could hinder crop development, and cause a reduction in yields. With no wiggle room on the balance sheet, we cannot afford to lose a bushel or beans would most likely see new highs. The goal this week should be to get positioned long on the break early in the week, as we expect for a late week rally into the August 12th acreage report, where the fear is the flooding, late plantings, re-seedings and a potential loss in acreage would take beans higher. November has penetrated the 100 day moving average as of Sunday night which has served as solid support; we see next support at $13.39 followed by $13.24. In order to see the trend reversed we would need to see a close above $14.09. Wheat: Weekly export sales showed 726 t.m.t. of wheat was sold last week. Strong demand continues as importers and end users with empty bins from last year move in to replenish stocks and meet immediate needs. With the spring wheat harvest just beginning we look for demand to remain strong. Wheat’s strength last week was short covering and buying off the charts, as it appears the recent lows will hold. Traders were unwinding their long corn, short wheat spreads and the commercial grain trader’s covered shorts, suggesting they believe a near term low is in. September CBOT has support at $7.80 with resistance coming in at $8.25. September KCBOT has support at $8.10 with resistance at $8.60. We are currently long KCBOT with clients looking for a trade back to $9.00 in coming weeks. As a risk parameter we will sell CBOT against our long KCBOT on a breakdown but that has yet to happen. ____________________________________________________________________ An analyst at the Macquarie Bank, based in Sydney, Australia, said that he expects world cocoa demand to outpace production for two more years before the market finds a balance sometime in 2010. September cocoa shot up $183 to $2,996, the highest close in two weeks. On the high we ran into resistance at the 50% Fibonacci retracement level. If that gives way next resistance is at 3078 with support at 2946. Look for cocoa to trade off the dollar and with 3 central bank meetings expect a volatile week. October sugar closed up 175 ticks at 14.13, the highest close in over four months, continuing to benefit from strong ethanol demand. Fund buying has been the major reason why this market has bounced in the last week. In addition, the market has found support from the supply and demand outlook for the 2008-2009 and 2009-2010 marketing years. There are expectations for a production deficit in the next couple of years, while the demand for sugar based ethanol is expected to remain strong. As we have continued to recommend for a longer term play sugar may be our favorite trade. We advise using the most recent spike to get out of October 08’ contracts and roll out to longer dated contracts. We currently are buying clients March 09’ futures and options. November orange juice fell just over 9 cents to a new contract low of $1.0765, a victim of good growing conditions and a lack of hurricane problems in Florida. We think that eventually this will turn and move higher and these low prices may justify some funds to get positioned long, but until that happens the path of least resistance is down and it would be like catching a falling knife trying to pick a bottom. On even the hint of a hurricane, look for a bottom to be made. We are in constant contact with the floor on option strategies and will be looking for a long option play soon. December cotton was sideways for most part of the week until sellers took over on Friday, as prices closed down 282 ticks lower on the week at 71.89. For the last month we have been basing out trading between 71 and 75 cents with traders battling for direction. We are currently positioned long with clients via futures and 10 cent call spreads in December. In the longer term the market depends entirely on the how the supply/demand situation takes shape, but unless we see bigger than expected yields or there is more demand destruction than anticipated, the current fundamentals seem to be supportive of higher prices. September coffee was up 244 ticks on the week closing just above the 100 day moving average. If you took our long recommendation from last week continue to trail your stop and look for $1.42/1.44 this week. Even in the face of commodity liquidation and weakness in other sectors, coffee and the other softs with the exception of FCOJ look favorable. Support comes in this week at 137.00 on September. ____________________________________________________________________ The metal’s markets along with commodities in general have been quite volatile in the last couple of weeks. Most of that volatility has been experienced in a downward manner as August gold lost $20 last week and is off $70 from its high 3 weeks ago. $25 daily ranges has become common place, so traders need more margin to trade and even the premium in options has jumped a bit. The same fundamental forces that have lifted gold still exist so we do favor the long side, but for the time being we are content on the sidelines as we said last week until we get a clearer picture on the dollar and oil. If you do buy on an inflation play or more of a position trade where you plan on being positioned for a lengthy time enter cautiously, and with defined risk parameters in place to allow for a long term position. August is now trading below $900 and we could get further pressure down to $870-860 before we turn higher. September silver was up 7 cents on the week, but this was after a trade below the 200 day moving average on Wednesday that was bought with a vengeance. As we said last week we felt that was very solid support as Silver has not closed below that level since October of 07’. We maintain this stance and will be buyers as long as that level continues to hold. We are buying clients $1.50-$2 call spreads for December and will be getting long in futures as well looking for the resumption of the uptrend. We have little doubt that between the 3 central bank meetings this week there will be talk of inflation, which should support. Resistance comes in at $17.80 on September followed by $18.15.
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