Bond and note futures traded mixed as traders spent the day squaring positions ahead of the long holiday weekend and tomorrow's non-farm payrolls data. The report is typically released on Friday but the government has adjusted the release date in observation of the 4th of July and the fact that the U.S. markets will be closed (for the most part). I can remember a few occasions in which market moving economic announcements were made on days in which the NYSE was closed, but various futures markets were open for abbreviated sessions. It typically isn't an ideal trading environment, luckily Friday won't be such a case.
Any sustainable bull market needs to take a breath and rest up for the next leg. The long commodity trade that has been working for the last several months has been momentarily put on hold. So what to do as a trader? We have taken profits on longs, decreased our long exposure, tightened up stops or in some instances done the unimaginable, gone short. Yes that's right, what investors need to understand is when speculating in commodities it's only a wager on if prices are too high or too low. The contract size is the same, the leverage is the same, the risk parameters and profit potential don't change that much. The only change is the direction. I'm sorry if you only manage your portfolio as long, in commodities you will have some rough patches. As long as the global economic recovery is in question we may get some dollar strength and commodity weakness but we feel that will be temporary.
Over the course of the last 12 months this Gold market has provided everything a Gold trader could want for trading Gold. The market has yielded mammoth trading ranges, huge volatility, and good volume. As a trader I certainly realize these are uncertain times in the worlds economies and it appears the threat of pending inflation has many investors scrambling to purchase physical Gold and other precious metals to use as"Leverage" and as an alternative to buying Stock.
Most Investors consider the Gold to be a "Safe Haven" in times of economic strife. Gold is the "anti Dollar" and with Crude Oil prices beginning to rally once again the Gold Community is settling in for what I believe to be continuous roller coaster ride.
Call it what you want but traders make money on identifying an opportunity and capitalizing on it, not the why. To me inflation is a foregone conclusion, the timing is the tricky party. When you have Nassim Nichols Taleb setting up a new fund to exploit volatility and what he views as hyperinflation to come, it is time to gain exposure in commodities. When China is diversifying out of US dollars and Treasuries into commodities, it is time to gain exposure in commodities. The trend has reversed in most commodities from agriculture to metals, softs to energies and we would advise investors to allocate a portion of their portfolios to commodities.
We have continued to do our weekly newsletters and daily blogs as scheduled but have not done as many topic specific articles of late. We are reaching out to get some suggestions from would be commodity investors or active traders on some topics of interest or subjects you would like clarified. This week we will be publishing an article on why understanding the "Greeks" is important to commodity options trading. Please comment for further suggestions.
Financials
Stocks: The Dow rose 223 points or 2.7% to 8500, the S&P picked up 3.6% or 32 points to 919 while the NASDAQ gained 82 points or 5% to 1774. With May now at our backs we've put in three positive months in a row, marking the best 3 month performance by percentage since 98'. This is an improvement from the doomsayer's just months ago. We've been consistent in our assessment and still expect a 10-15% correction is around the corner. For much of May the S&P was range bound between 875 and 930 and the Dow between 8100 and 8550, will this continue? Although we expect a downward break, the move out of these ranges should signal the next direction.
Bonds: September 30-yr bonds were lower by 11.5 ticks last week; trading lower 9 out of the last 10 weeks. Prices were able to rally just over 3 basis points off the weekly lows so we should get an additional bounce. Support is seen between 116'10/116'20 with resistance at 118'20. In the coming weeks we expect a move up to 120'00/121'00. September 10-yr notes were lower by 18.5 ticks last week. Support is seen at 116'00 while resistance comes in between 117'20/118'00. As for the Euro-dollar, stay short March 10' as long as 99.095 remains as the contract high. As for options we advised clients to buy December 09' 99.00, 98.75, and 98.50 puts. Contact us for pricing. NFP # out Friday; loss of 525,000 jobs and unemployment rate just over 9% is factored in.
If China is increasing protein in their diets and buying more soybeans, then maybe you should be long soybeans. If China is stockpiling copper to have an ample supply for building an infrastructure, then maybe you should be long copper. If rumors circulate that China is diversifying their reserves from US dollars by buying precious metals, then maybe precious metals should be in your portfolio. China has become a major energy user so there is a logical potential for energies to bid higher for years to come. The moral of the story here is to view what China does as to what the smart money is doing and maybe investors should follow their lead.
June gold futures prices are hovering near the top of the recent trading range as the market is in a four-week-old uptrend on the daily bar chart. A close in June gold futures prices above solid technical resistance at last week's high of $934.80 would provide the bulls with fresh technical strength to suggest another leg up in prices in the near term. The next upside technical objective for the gold market bulls is to push and close June futures prices above chart resistance at the March high of $970.00 an ounce. A push in prices above that level would open the door to a challenge of the February high of $1,009.80. The contract high in June gold was scored in March of 2008, at $1,035.00.
Interest rate products stabilized on Tuesday allowing the market to digest yesterday's swift sell-off. We warned you last week that this would be a slow news week...and it has been. The only guidance that Treasury traders seem to be relying on is the direction of equity trade. Unfortunately, thin stock volume has resulted in yesterday's questionably relentless rally and today's refusal to correct. While we have been bullish the S&P since the index made its low in the 870's we were a little surprised at the magnitude of the rally. That said, we still believe that the S&P will make its way higher, approximately to the 940 area; if this is an accurate assumption, Treasuries should find themselves retesting the May lows and slightly beyond.
Keeping bonds and notes under pressure are assumptions that the U.S. economy is showing signs of recovery. The newest evidence supporting this theory is a statement made by Gary Stern, President of the Minneapolis Fed;
"As we get into the middle of 2010 and beyond, I would expect to see a resumption of healthy growth." He also downplayed the role of deflation, "To date, there is scant evidence of deflation in so-called core measures of inflation." He added, "If economic growth resumes in the United States as I expect, the threat of deflation should diminish commensurately."
