Supply & Demand in Commodities

It is viewed by many that a modest increase in commodity prices is a sign that demand is coming back to the market. We need to point out demand is only one side of the equation, the other being supply. We do agree that once prices stabilize we could see further upside, as the global economy starts to digest the recent stimulus, which should lead to inflation down the road. The 2 main questions are how long and windy will that road be and how much inflation will we have? Over the years, one of the main aspects within commodities that has intrigued me is the economics, supply and demand govern the price as opposed to an executive sleeping with his assistant, a missed earnings report or a short seller with an agenda. Yes, just like any market, commodities can be manipulated but to a bigger degree these markets make sense. A hurricane, flood or drought will affect supplies and therefore price. A significant population expansion, a growing middle class with an appetite for better things; i.e. more demand should fuel a commodities bull market for years. It is our viewpoint that we are in the 4th or 5th inning and just taking a rest before the next leg up begins.

Stocks: Stocks ended the week much better than they stated, clawing back to end modestly lower. The Dow finished the week 55 points or less than 1% lower at 8076 for its first loss in 7 weeks. The S&P traded on both sides of positive and negative but finished the week 3 points lower at 866. For the month of April the S&P is up nearly 9% and on track for its best 2 month run since 75′. The NASDAQ was able to keep its streak alive, ending higher for the seventh consecutive week adding 21 points to 1694. Earnings were largely ignored as were the stress tests, as the market disregarded these tests feeling the gov’t is once again letting banks off the hook. With the results still 1 week away don’t hold your breath for any earth shattering results. The dilemma is that the recent rally was led by financials and with banks on the guillotine we feel it’s unlikely the financials will remain the leaders. We remain cautiously optimistic but if forced to pick a direction we would say down. That is not to say an attempt at 900+ on the S&P is unlikely, we will just be spectators not speculators. Remember the adage “Sell in May and go away.”
Bonds: June 30-yr bonds were lower by just over 1 basis point with the lowest trade since 3/18. Support is seen at 123’00 with resistance at 126’00. The trend remains down but we could see a bounce being prices have come off 7 basis points just in the last 3 ½ weeks. June 10-yr notes were lower by 21.5 ticks last week, like bonds was the lowest price since 3/18. Support comes in between 120’16-120’23 with resistance between 122’05-122’16. The trend remains down but the pace of selling may slow now with the rate back above 3.0%. We are advising clients to continue accumulating shorts in March 10′ Euro-dollar positions. We are approximately in the middle of the trading range we have been in for the last 3 months. The Fed meets this week and we expect no change in policy, at most some jawboning on how to keep longer term rates low.
July cocoa picked up $58 last week recovering from the previous 2 week’s losses of $383. Support is seen at 2400 with resistance at 2500 followed by 2532, the 20 day moving average. On further weakness in the dollar we may see a short covering bounce being prices are oversold.
July sugar closed up 54 ticks, the highest close in 7 months, helped by higher gasoline prices and what appears to be fund buying. Support comes in between 13.70 and 13.80 with resistance at 14.25 followed by 14.60. We have advised clients to lighten up on longs or at a minimum tighten up stops. Additionally, our clients sold July calls against some of our October call positions.
The US Census Bureau said that cotton mill use increased from an annual rate of 3.09 to 3.14 million bales in March. July cotton closed up 2.10 cents at its highest level since late January. Resistance comes in between 53.50/54 with first support at 51.00 followed by 50.00. We would be a cautious buyer on breaks. We have considered selling July calls against a purchase of October calls; contact us for pricing.
July coffee prices reversed course mid-week with news that truck drivers in Colombia went on strike for lower fuel prices. July coffee ended the week higher by 5.90 cents. When prices failed to break support at 112.75 early last week we chose to cover the 140 calls for our clients by buying this leg back for a profit of $770 per position. We will now look to trade out of their 120 calls this week at 700 points O/B. Support comes in at 116.25 with resistance at 119.75 followed by 122.25. The lesson here is as the market is always evolving you sometimes need to adapt your trading strategy.
The USDA’s Florida weather crop report said that due to the dry conditions, trees ranged from poor in groves with less maintenance and little irrigation to good in well-cared for groves. The report also said that drought intensity has reached severe to extreme in some areas. July orange juice ended down 3.50 cents, moving lower as we had forecast last week. Support is seen at the 20 day moving average at 82.90 with resistance at 86.90 followed by 88.25. We expect a move down to 77/79 where we may opt to get long.
June gold was higher by $43.90 or 5% on the week, after 4 losing weeks the market reversed direction and took off. The triple bottom at $865 that we spoke about last week served as solid support and as long as prices stay above those levels we’ll remain long with clients. We were expecting an opportunity to get long from lower levels but that did not work out with a decisive move back above $900 on big volume. The market was likely influenced by comments out of China that their reserves of gold were reported to be much larger than previous estimates. Immediate support comes in at the psychological level at 900 followed by the 100 day moving average at 890.20. Resistance is seen at 919 followed by 937. Those not comfortable scaling into long futures we suggest purchasing $100 and $150 call spreads in August.
July silver was higher by $1.17 or 10% once again approaching the $13 level. Prices closed almost $2.20 off the weekly lows as a violent reversal took place. Support is seen between 12.50 and 12.60 with first resistance at 13.25 followed by 13.70. Prices managed to close back above the 200 day moving average for the first time since 3/27 which should indicate higher ground. We have been fairly consistent for the last few months and in terms of risk to reward silver remains our number 1 bullish recommendation. In the coming weeks 14.50 is achievable and on further dollar weakness and on another leg down in stocks we could see even higher pricing. We have numerous medium-term and longer-term bullish strategies, contact us for pricing.
The International Copper Study Group said they expect a world production surplus for copper of 345,000 tons in 09′ and 400,000 tons in 10′. They acknowledged that the world’s economic crisis makes it harder to predict, but they expect world refined usage to be down at least 4% in 09′ and mine production to be up 4%. July copper finished down 16.7 cents, a further 15-25 cents is necessary to the downside before we will look to go long.
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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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