Commodities: A Pause or a Reversal?

With half of 2009 behind us investors may be wondering if they have enough exposure to commodities in their portfolios. Several commodities gained value in the first 6 months of the year on expectations for a global economic recovery and on worries of inflation. There are many uncertainties that remain unanswered, if, how strong, and the sustainability of this recovery. It may be smart to cover some of your commodity longs or scale back your exposure as it appears that in the immediate future we could see some give back. We’re convinced this will not be a reversal but yet just a pause in a bull market with many more years of life.


Financials
Stocks: For stocks to move out of their recent range and have any chance of higher ground the economic growth must catch up to the markets’ expectations, which we think is doubtful. Last week the Dow slipped for a third consecutive week losing 158 points, just less than 2% to 8281. The S&P 500 fell 22 points or 2.5% to 896. The NASDAQ gave up 42 points or 2.3% to 1797. As the second quarter concludes the latest rally seems to have run out of gas. Reflected in the lack of volume investors aren’t convinced a new bull was born. As long as prices stay below the 50 day moving averages we expect further downside; in the Dow at 8380 and the S&P 500 at 904. Setting the tone this week what comes out of the G-8 on economic policy, interest rates, the dollar remaining as the reserve currency, inflation vs. deflation and further credit developments.
Bonds: The NFP # put the unemployment at 9.5% in June with a loss of 467,000 jobs, a larger loss than expected. September 30-yr bonds were higher by 20 ticks last week trading to their highest level since 5/22. We may still see 120’00 but trail stops on longs as prices have become overbought. Resistance comes in at 120’16 with support at 118’00. September 10-yr notes were higher by 17.5 ticks last week. Support is seen at 116’00 with resistance at 117’16. March 10′ Euro-dollars gained 10 ticks last week. Exhaustion was seen late last week and being prices are within 15 ticks of their contract highs we love the risk/reward dynamic getting short at these levels. Continue to scale into short futures and buy puts in the March 10′ contract.
Currencies
The ECB met and kept its interest rate unchanged at 1.0%. The Euro lost 33 ticks last week closing once again above 1.40. For now the 20 day moving average appears to be the line in the sand as prices have failed to close below that level after multiple attempts. On a breach of the 20 day moving average at 1.3990 expect a trade down to 1.38/1.3825. Resistance is seen at 1.4150.
The Aussie was lower by 111 ticks closing just under the 20 day moving average. The RBA is scheduled to meet this week and is expected to leave rates alone at 3.0%. Support is seen at.7825 followed by .7750 with resistance at .8050.
The Swissie was virtually unchanged gaining 2 ticks last week as sideways action continues now for the fourth week. The activity was anything but boring with last week’s trading range almost 3 ½ cents, with intervention still looming. Support comes in at .9140, resistance at .9270 followed by .9320.
The Loonie was lower by 67 ticks as weakness in commodities may have contributed. Last week’s low at .8576 should support while resistance is seen at .8760. Trade ideas: buy the September 89 call for approximately $1,000, buy the 85/90 call spreads for $1,900 or get long the futures with stops below .8560.
The Cable was lower by 87 ticks last week. Resistance remains at 1.6650 with support now at 1.6200. We’re expecting a down move but currently have no exposure with clients. The BoE meeting should bring no change in rates which are expected to stay at 0.50%.
The unemployment rate in Japan came out last week with the highest level in five years. Last week the yen was lower by 56 ticks, it’s first negative week in the last four weeks. Support comes in at the 20 day moving average at 1.0370 with resistance at 1.0525. If equities continue lower don’t rule out a trade over 1.06. Aggressive traders could purchase September 110 calls for $1,000 with an objective of $1,500.
The Kiwi was lower by 153 ticks with the short term trend clearly turning lower. Resistance is seen at .6370/6390 with support at .6200 followed by .6125.
The US dollar index gained 62 ticks last week closing just above the 20 day moving average. Support comes in at 79.80 resistance at 81.25. We’re expecting a trade up to 82.00 and although we may not trade the dollar most markets will be affected on that move.
Metals
August gold traded lower by $8.20 last week to form an inside week. This is not the most bullish news and if the dollar was to continue its push upward we could see further consolidation. Being that prices are now below the 50 and 100 day moving average I would like to see consecutive closes back above those levels before getting considerable long exposure for clients. Support is first seen at 914/918 followed by 900 with resistance at 942/950. On 2 consecutive closes above 950 that should signal prices are on their way to 1000, which we do expect in Q3. Our favored play remains October $100 call spreads.
September silver lost 67.5 cents last week and has now closed lower for the fifth consecutive week losing 17% in that time frame. Last week’s low at 13.29 will offer mild support but on a breach of that level expect another $1 move south. Resistance comes in at the 100 day moving average at 13.65 followed by the 50 day moving average at 14.20. We will continue to accumulate $3 December call spreads for clients, however we would advise lightening up on futures until a bottom is confirmed.
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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.

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