RSSEvent-Laden Backdrop Will Drive Commodities
By Matthew Bradbard | November 17, 2008 | 11:32 AM | 0 Comments
It’s tough to keep up with the day to day happenings, but the most important recent events as we see it are the re-structuring of the TARP, the announcement of a Chinese stimulus plan, the G-20 meeting, the November 15th hedge fund redemption deadline, and the presidential election. There is so much more than just these events that will have an impact, however these are the most pressing issues. We suggest taking a step back, assessing your current portfolio and seeing what has and hasn’t worked of late to help formulate better judgments on future decisions. We maintain that investors with a longer time frame should be handsomely rewarded by scaling into longs in a select number of commodities.
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Softs
December cocoa picked up $96 last week largely believed to be short covering. 2050 should serve as resistance with 1950 serving as support. Action will largely be governed by the short term direction of the US dollar, on further dollar selling look for cocoa to make its way to 2190.
March 09’ sugar lost 55 ticks last week to close back below 12 cents once again. We suggested clients to re-enter the May 09’ 14 cent calls that we just exited on the last advance above 13 cents. We were able to get these bought between $575-675 and if that opportunity still existed this week we would still be a buyer. If 11.29 holds as support we should see a relatively quick trade back to 12.50/13.00, but if it was to give way we would most likely find sugar back at 10.50 in March. Talking to floor traders in the options pit, which I do on a daily basis, there is a lot of interest in and out of the money long dated calls as many big traders are looking for a large move higher in sugar, but are unclear on the timing.
March 09’ cotton gave up an additional 3 ½ cents last week to trade near 6 ½ year lows. Prices have now been lower 10 of the last 11 weeks and without a pick up in demand the low 30 cent level seems attainable. Cotton will be one hell of a buy when prices bottom, but who knows when that level will be determined. One suggestion if you want some cotton exposure is to short March futures while simultaneously buying 3 March 50 cent calls for approximately 180 points each. That would be an outlay of about $2700 and we would suggest covering the short futures on a 3 1/2 to 5 cent profit and holding the options looking for an eventual move back to 50 cents.
January orange juice lost 3.60 cents last week closing just under 83 cents. For the last 4 weeks 80 cents has been able to support on a closing basis. We would need to see a trade back above 87 cents to confirm prices are making there way back to 1.00; which is our near term target.
Coffee prices on the December contract lost 2 cents last week closing lower all 5 sessions. 109.00 should support while 115.00 has contained rallies. We are still trying to trade out of the 95/125 fence options we purchased for clients 2 weeks ago. We paid 4 cents and will be looking for an exit of 6-7 cents on a move back to the 116.50 area this week. Although price may remain range bound in the near term coffee has the potential to make a considerable move in 2009. We will re-visit this in future commentaries.
Metals
For the last 5 weeks December 08’ silver has been trading between 8.50 and 10.50. Volatility has been present as the average weekly trading range over that same time frame has been $1.77 or $8,850 per 5,000 ounce futures contract. It appears silver is building a base and we continue to advise clients to acquire March mini-futures until a bottom is confirmed and then we will shift to the standard contract. Additionally, we will continue to build a position in the December 09’ $5 bull call spreads we have been preaching about for the last 3 weeks. http://www.mbwealth.com/articles/hihosilver.pdf
After a $70 trading range on the December 08’ gold contract prices managed to close only $2.70 higher on the week. Over the last 3 weeks attempted moves to $770 have failed to hold so it appears buying interest has narrowed or traders are selling rallies. $700 should serve as solid support on pullbacks. As we have made clear we prefer silver to gold, all things considered. There seems to be good open interest in the 740 puts so that level should serve as a magnet into expiration this Thursday.
It looks like Asian demand for copper is slowing dramatically. London inventories of copper were up 4,625 tons to 270,100 tons last week, the most in over four and a half years. December copper ended only 2 cents lower last week but prices have lost 55% in the last 4 months. If and when copper prices stabilize it should mean that the economy has factored in the worse as copper is typically used as a gauge of the overall economy. On another leg down in copper look for most commodities to lose ground.
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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. Calculations of profit and loss have not factored in commissions and fees.
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