Market Deep in Contango

Energies Crude oil is trying to make a decision on where to go from here, the way I see it on a breach of either $73 or $67 in October that will determine if prices move higher or lower. With peak driving demand and hurricane season behind us it we could get a spike lower but for now we have clients positioned in December $75/80 call spreads. Though no exposure for clients in RBOB or heating oil we continue to feel they will follow Crude higher or lower. Natural gas has bounced 56 cents off the recent lows as of Fridays’ close and intra day was almost 50 cents higher. We recognize this is short covering but could this be the beginning of a larger move? Being the sentiment is so bearish we think yes. Clients in October will lose money but we continue to think longs in November and further out should make money. We like the idea of buying December and January this week on a setback. Remember when looking at prices this market is deep in contango so $5/$6 a few months out we believe is very possible even though the front month is under $3.
Livestock A sideways market still exists in cattle but we maintain our bullishness and would recommend long exposure. We have been creative in our cattle trades for client’s thanks in large part to a livestock CTA with 30 plus years experience we trade with. They feel we are in the beginning stages of a 2 year bull market in cattle and we concur. We have been starting to buy outright longs but for the most part have been trading live cattle calendar spread with some success. Contact us for a further explanation. On behalf of clients we have now taken off all of their October and a majority of their December lean hogs contracts. Haven taken advantage of the recent 10 cent advance in the futures market we suggest looking for a pullback to get re-positioned long again.
Stocks: Whether we agree with the recent appreciation in equities is inconsequential, stock markets have continued to march higher just with out our clients. As a trader you sometimes need to ignore your opinions and feelings and just listen to the market. On a trade above 1050 and 9600 in the S&P and Dow respectively we would most likely see more upside. Look for the CPI and PPI to guide this week as the markets prepare for the FOMC meeting the following week. We do expect a test of the 50 day moving averages in coming weeks but at this point do not know what the catalyst will be for a sell-off. In the S&P that level comes in at 975 and in the Dow 9000.
Bonds: Treasuries remain a traders market as they continue to act indecisively swaying to and fro. We instructed clients to lift their October 10-yr note puts at a slight profit and to remain long the December 30-yr bonds. On a new high this week we should see bonds trade through 123’00, at what point we would most likely lift their longs. We continue to advise clients to use rallies in the Euro-dollar to buy long dated puts and to short futures. This strategy is not about a quick profit but rather building a short position in an instrument that should topple not necessarily when we start raising rates domestically but rather when the inflation sentiment shifts.
Currencies The moves south in the US dollar continues as we are now at the lowest level since September 08′. I cannot dispute the trend is down and we may see lower ground but the problem I have with that theory is that everyone feels that way and usually when that is the case everyone is wrong. The daily and weekly charts show little support but we still caution investors about getting too short dollars or too long commodities. All international currencies have broken out of their recent sideways pattern with the yen’s move last week being the most impressive gaining 2.6%. We are pricing out longs in the yen for clients and will have some ideas on a set back this week. Being long the yen in September has been a profitable proposition 24 out of the last 32 years. Past performance is not indicative of future results. Last week the BoE kept rates unchanged at 0.50% and the BoC left rates alone at 0.25%. The only currency exposure we have with clients is a small short options position in December Euro-currency which is currently under water.
Grains The USDA report came out largely in line with expectation showing a mammoth crop in both soybeans and corn. The markets were largely unaffected as this had previously been priced in. We currently have no exposure in soybeans or the derivatives of and at this point have no trade recommendations. Over the years I have found in the agriculture sector that the oats market is generally the first grain market to move and it looks like we may have formed a bottom. On the December contract as long as$2 holds we like re-establishing longs in corn and wheat with one eyed focused on the oats market. We are suggesting client to be long March 10′ CBOT wheat futures with stops below the recent lows. In corn we’ve been suggesting close to the money December and March calls or to get long futures with options protection. Contacts us for more details.
Softs On a dollar rally cocoa prices should fall, at this point we have no short exposure with clients but we are pricing out various strategies. They include futures and options plays such as calendar spreads, back spreads, getting short futures and selling puts against the futures as well as straight put options. One should note that we had clients in October puts that recently expired worthless. Getting short September cocoa in mid-September and holding until late November has worked 28 out of the last 36 years. Past performance is not indicative of future results. Client’s hit their objective in their coffee longs last week making just shy of 200% in less than 2 weeks. Not too bad of a trade, I only wish we had more of these. We suggested for clients who did not already have long exposure in sugar to buy March 10’calls last week. As long as 22 cents holds we fully expect a re-visit if the 25 /26 cent level in coming weeks. In the last 30 days OJ prices have lost just over 20% and now prices are starting to look ripe for a pop higher. We are suggesting a light long position in November with stops below last weeks’ low and also buying the January $1.00 calls for $850/900.
Metals It is difficult to read a newspaper or watch television without hearing about precious metals moving higher. That being said we have advised clients to take profits on ALL their longs in gold and silver and to move to the sidelines. That may be a little counter intuitive but we feel a violent correction is coming followed by a much larger move higher. We would suggest keeping your powder dry and be ready to pounce on this correction as we are getting clients ready to purchase both gold and silver contracts into next year. In a perfect world we would get a $70-100 correction in gold and $1.50-2.50 correction in silver. The fact that copper prices have failed to penetrate the $3 level we think that spells a correction. Being we started the year with prices closer to $1.30 why couldn’t we see a 40/50 cent set back?
Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.