Commodities serving as Diversification

When a portion of your portfolio is diversified into commodities on days like today there should be no need to panic. Crude traded to a nine month low today dragging prices very close the $80/barrel mark. It’s been painful but we highly doubt a 20% reduction is justified. The pundits say it is demand destruction but the reality is investors are raising cash, covering margins and the baby is getting thrown out with the bath water. Crude, the distillates and natural gas are a buy in my opinion. It has been a tough trade but scale in as we expect a sharp correction very soon. I cannot stress enough this is my opinion, do your own homework and if you disagree that is fine…that is what makes a market. We feel oil could see $95 before it sees $75. Natural gas remains over sold but at these price points it may be one of the best buys in commodities…again my opinion.
Our suggestion is to gain bullish exposure in October contracts. Black swan, white sheep, pink flamingo call it what you want the Credit downgrade by S&P has the stock market on its heels . We should see a bounce at some point but I am hearing whispers of 2008 revisited so maybe a better trade is the sidelines as opposed to picking a bottom. Some aggressive clients have light exposure in September ES puts but need serious help. FYI a 50% Fibonacci retracement lifts September back to 1230/1235 so anything is possible. Gold gained 4% today trading ever closer to $1800/ounce. It makes me nervous when gold outpaces silver by a ratio of nearly 2:1. We have no exposure and still think a correction is due but I am besides myself missing this move for clients. To me though being on the sidelines in gold is far better than being in the stock market…it could be worse.
The commodity currencies were hit the hardest today with the Aussie lower by 2.6%, the Kiwi giving up 2.6% and the Loonie down by 1.4%. We would book profits in all shorts in the aforementioned crosses and have advised clients to start scaling into longs in the Loonie. The suggestion is to get long here at five month lows just looking for a bounce to 1.0300. Sugar traded below the 50 day MA today for the first time in three months. We may get a rally that we would look to sell for clients…trade accordingly. Most of our clients took their shorts off in recent sessions. OJ gave up another 5% today making it nearly 15% in the last five sessions. Clients with bearish positions were advised to book profits on their shorts. We’ve yet to make a move but lumber is on or radar as a potential buy with prices down 20% in the last month…stay tuned.
A new high in Treasuries as investors would rather get a minute yield than lose money…how long will this continue is anyone’s guess. Avoid bearish plays until the circumstances change. This could happen on some sort of global intervention of verbiage from the FOMC tomorrow…stay tuned. Corn gave up 2.5%, soybeans 1.8% and wheat the biggest loser at 3.7%. All three may trade lower but being were holding around the 200 day MA we’ve advised aggressive clients to start scaling into November soybeans. Our suggestion was to purchase $1 bull call spreads. Lean hogs lost 1.7% today closing back under the 20 day MA. On a further break tomorrow we will be looking to offset clients shorts at a profit. We would likely look for an exit door in October closer to 88/88.50.
Risk disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.

One Response to Commodities serving as Diversification

  1. trader joe September 4, 2011 at 9:18 pm #

    I don’ think the gold to silver ratio is anything to worry about yet – it still hasn’t reached its 1991 record of 100 ounces of silver to 1 ounce of gold, and has been trading between 1:40 to 1:46 since May, not approaching it’s 2011 high between 1:70 and 1:71.