Weekly Commodities Outlook: Sept. 15 - 19
Extreme volatility is an understatement in this environment. We have been suggesting paring back your position size and when taking a trade step in lightly. We would continue to caution investors into getting too committed on any trades in this environment. When the government takes over the 2 largest lenders, when a 158 year old financial institution is on the brink of insolvency, and when gasoline spikes to $5.50, this isn’t the setting to be a hero. The key is to keep your powder dry so when a genuine opportunity presents itself, where the risk/reward dynamic makes sense, you have capital to trade. With just a few missteps your capital can disappear, so be patient.
Financials
Stocks: Never a dull moment as stock traders must be nervous to take cigarette and bathroom breaks with this volatility. The Dow gained 201 points last week to finish 1.8% higher; the S&P just managed its first gain in four weeks by adding 9 points to finish 0.8% higher at 1252. The NASDAQ also managed a slight gain after being down the three previous weeks; gaining 5 points or 0.2% at 2261. We don’t expect much up activity unless the Fed gets extremely creative, but this market has surprised us before. Consumer confidence is at a 16 year low, the housing market has yet to find a bottom, and we expect there to be a problem with auto loans and credit cards very soon. On a positive note, oh wait, negative note, oil prices are below $100?? The only positive we see is there are record amounts of money on the sidelines and depending on where that money finds a home, that will be the next sector to move higher. Resistance on the Dow is at 11580 followed by 11700 with support at 11325 followed by 11200. The S&P should find resistance at 1270 followed by 1300 with strong support between 1200 and 1210. Stay defensive!
Bonds: Treasuries started to move lower as we had forecasted at the end of last week and appear like they may reach our targets of 115’16 in December 30-yr bonds and 114’00 on 10-yr notes; we were just a week too early. Interest rate futures contracts are pricing in expectations that the Fed could cut rates to 1.75% before the end of the year. Economists don’t think the Fed will act this week keeping rates at 2.0%, but perhaps some inventive rhetoric or a new tool being implemented from Bernanke’s toolbox. I’m not too comfortable going short futures yet, but we have been pricing out December puts in both bonds and notes for clients. With a violent sell off in stocks, expect new highs in the debt market.
Softs
Depending on how you approached December cocoa last week traders may have made a few quick bucks or still be positioned long. If you look at last week’s commentary we recommended a buy below 2550 with stops below 2515, we got within 1 tick of being stopped out with last week’s low at 2516 and last week’s high at 2608. Corruption scandals, strikes, and power struggles that have rocked the Ivory Coast's cocoa sector, and the upcoming elections could continue to rattle market. Analysts expect the world's biggest cocoa grower, which has kept on producing big harvests despite a brief 2002/2003 civil war and long running political crisis, will still get its beans to market despite the turmoil. Dollar weakness should help cocoa prices move higher in the short term, but we will be looking for a potential short entry as prices generally fade this time of year.
Cotton prices have been moving lower since the beginning of September as December has given up just over a nickel in the futures. The USDA increased 08-09 ending stocks in cotton from 4.6 to 4.9 million bales. Despite the neutral to slightly bearish report, cotton prices moved higher due to oversold conditions and the weakness in the dollar. If the market has found a bottom, we could see prices retrace back to the trend line at 68.00 and ultimately thru that level and above 70 in the coming weeks. Recent drought conditions have destroyed 1.3 million acres of the 4.7 million cotton acres planted in Texas. Hurricane Ike dumped heavy rain on the Texas cotton fields which could cause further damage to the crop. There is no question that supplies have gotten smaller with the recent weather, but the demand or lack there of will need to pick up to turn prices significantly higher. We have advised clients on new purchases to split positions between December 08’ and March 09’.
March sugar was down 31 ticks on the week, but after a test of the 200 day moving average we had a solid showing to end the week with Friday prices gaining 45 points to close the week at 14.06. Charts are extremely oversold and this week we will most likely see a tug of war between weak energy prices and a falling dollar to see what influences sugar more. The USDA reduced 08-09 ending stocks in sugar from 767,000 to 505,000 tons. The sugar market typically declines into the beginning of sugar beet harvest, which must be complete before the first heavy frost. Anticipation of new supply tends to drive prices lower; but, after October futures expire on the last day of September, consumers must use March to hedge their needs in the New Year. Thus, prices tend to rise throughout the fourth quarter even as cane harvest continues. We will repeat the advice from last week as we still like accumulating 15, 16, 17 cent calls in March 09’ for clients.
The entire risk premium has been sucked out of orange juice as the recent hurricane activity has missed Florida’s citrus regions. We still like buying January out of the money calls for the “what if” scenario. In the last week prices have come off 15-20 cents depending on the month. You can now buy the January 120 calls for the same price we bought 160 calls just weeks ago. It is far from our favorite trade, but at a small premium traders can have some exposure on potential hurricanes threats and if funds re-emerge looking for value current fcoj prices are near the lowest level we have seen in 3 years.
December coffee prices were down 4 cents last week and we closed below 1.40 just as we had been forecasting for the last 2 weeks. Coffee remains on our no interest list until October or we see a trade down to 1.30, whatever scenario happens first. The trade we mentioned last week has already met over half of its objective so if you took our advice start to look for an exit; just less than 1.37 should be your target.
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.
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