US Futures Summary

Summer volatility yields new questions, opportunities
Notable moves since our last US Futures Summary report (4/5) include a sharp 4% drop in the US Dollar index, a $7 round trip in crude, a $140 rally in gold (followed by $100 drop), huge swings in the price of silver and the worst May performance in 22 years for the SP500 index. Questions of inflation, Iran, the Fed and over speculation in commodity prices continue to dominate.

Two weeks ago an editor from one of the major news services practically begged us for a statement supporting the idea of top in the GSCI/CRB, or at the very least a top in metals or energy. We gave no statement. Not because we can’t think of reasons why a top might be at hand. But rather because we believe the old traders anecdote is absolutely true, which says major tops are harder to detect and more treacherous to trade than other market phases.
When crude and the GSCI lagged behind the (pre-Jefferies) CRB index in March of 2005 for the first time since 1999, we talked publicly about the idea of a top in the broad indexes. That idea ‘worked’ for about a month or two. We were on the wrong side of copper for most of last year. And we turned prematurely bearish crude earlier this year. Thankfully we got a lot of other stuff right. The point being, however, that looking for major (and even minor) tops in a secular bull market — is a major challenge.
For the time being, we’ll refrain from making any major statements, the kind usually requested by reporters, and instead focus on the data and market action, letting them shape our ideas and strategies. With respect to the whole commodity slash inflation story, what are some of the factors we’re watching right now? Open interest in high-grade copper, perhaps the most leading edge commodity of all, has been on a declining path since peaking in April of last year. If even the shorts are exiting copper, who will be there to buy when the inevitable top finally arrives?
Charts illustrate the disparity in performance between certain commodity sub-sectors, and draws into question the inflation argument made by headline-grabbing energy and metals markets. Other interesting juxtapositions worth mentioning include the continued rise in crude prices versus the price action in large cap exploration and production (E&P) stocks. These stocks, which are normally quite sensitive to swings in oil prices, appear to be forming major tops. EOG (chart this page, below) is just one example of many similar looking patterns evident in the group (SUN, XTO, DVN, APA, etc.).
Price deterioration and top-heavy chart patterns in the housing sector (PHM, LEN, TOL) are another interesting backdrop to the inflation and commodity price discussion. Lastly, weekly charts of silver and gold futures look downright scary to us. Maybe I should call that reporter back.
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