Wednesday 9/29/10 Commodity Ideas

Opening Note:

Yesterday
Early morning buying in the Energies and Metals did not translate into early gains for the Equity markets. Proof that one rotten Apple can spoil it for the whole group was evident on the stock market open, as rumors swirled that Apple's likely CEO in waiting was leaving the company. Because Apple makes up nearly 20% of the Nasdaq composite the Index went on a wild early morning ride with a very negative Consumer Confidence number also adding to the turmoil. The rumors eventually proved to be false and the Equity markets actually recovered quite nicely despite the poor Consumer Confidence number, but it was pretty clear that all systems were not on the buying auto-pilot like they were over the previous week.

The Grain markets came under pressure yesterday as liquidation in the Corn and Wheat markets led the Sector lower. With the Grain Stocks report tomorrow as well as the end of the quarter it appears that Bullish enthusiasm may have over-allocated itself. December Corn settled at the psychological $5.00 level and Wheat looks like it could actually be a decent short position.

For the most part the rest of the macro relationships fell into line with no real red flags. The Fixed Income Sector was strong while the Equities settled higher and the Dollar lower, but the relationship among these Sectors is much looser now. Interest rates should continue to come under pressure as people front-run possible Fed stimulus, the Dollar will move lower as it is expected money will be printed, and the Equity markets benefit from the stimulus and the comparative value versus low interest rates in some of these fixed income vehicles. On a day to day basis all three of these can move on their own for the time being with only a significant move in one without the others setting off an out-of-line alert.

Today
The macro market is slightly stronger with Equities, Energies, Metals, and Foreign Currencies higher. I say slightly though because many of these markets are trading back near the middle of their overnight range after falling back in the evening. The Grain markets are a disaster as Corn and Wheat have fallen under further selling pressure that could cause another wave of liquidation today in advance of tomorrow's report. The rest of the "Things That Grow" trade also is coming under pressure with Cotton over 2 1/2 cents lower and Sugar, Coffee, and Hogs weaker.

I was actually very impressed with the stock market's reaction to yesterday's Consumer Confidence number. The number continues to trend lower and fell well below expectations, but the Nasdaq was still able to find the strength to settle nearly unchanged on the day 30 points above its low. That being said, it definitely feels like the allocation wheels are slowing on the QE trade for right now. The Dollar Index looks the most consistent for the time being, but the Physical Commodities and Equities may need a break as the 3rd Quarter comes to an end. While it was time to jump on the push higher over the last week I think we may need to hold off until Friday when beginning of the month and 4th Quarter re-positioning takes over some of the profit taking that appears to be happening now.

Buys to Watch: (Nasdaq moved to Radar)

Sells to Watch:

Dollar Index- The Dollar Index is the only trade in play for right now because it is the most consistent since the Fed meeting last Tuesday. The 5 word fundamental summary is "more money equals lower dollar", which is the direct effect of Quantitative Easing in the future. Moderate volume resistance from yesterday's trade was left from 79.09 - 79.19 that has produced the highs for the current market session. You may choose to place your stop around this level to lock in better profits. However, there is a low volume zone from 79.30 - 79.45 for short entry with higher volume resistance from 79.50 - 79.65 to place your stop above. I believe this a good setup for new short entry that I recommend either adding to a short position or initiating a new short position at. The longer term objective for the Dollar is 75.00 with the caveate that if the Euro reaches 140.50 that it is time to re-evaluate a Dollar short position. Keep selling the rallies.

Put on the Radar:

Nasdaq- I pretty much did most of my Apple and Equity market discussion in the opening note, but I have a few more reasons I want to hold off on the Nasdaq for now. Technically, Stochastics for the daily chart has confirmed the sell signal crossover that shows shorter term momentum has turned negative for the market. In addition, the 1150 level in the S&P 500 appears to be stronger resistance than I initially though it would be, as the stock market continues to fail each time it smells this level. Finally, while the market did recover nicely after a poor Consumer Confidence number it was still an awful number. The market has blown through all of the troubling Economic data over the last month, but with 3rd Quarter profit taking and Bullish enthusiasm feeling over-extended it seems like the time to sit back. I still feel very confident in the 2080 - 2135 longer term objective for the Nasdaq, but the market may need a consolidation pullback for the time being. Still keep your mind set on looking to buy the dips going forward.

Grains- The Grain markets are falling apart in front of tomorrow's stocks report. With the markets much lower already this morning I would not be surprised if there was an initial panic on the open because the big money does not do most of its trading overnight. While yesterday's session could be viewed as the 2nd day on a moderate 2 - 3 day pullback, this morning's price break looks more like capitulation. This is not a confidence booster for any newer longs in these markets.

Remember that tomorrow is the Stocks Report and I highly recommend liquidating positions and staying flat for the time being. It looks like there is a good chance of volatility on tomorrow's open, which could provide good opportunity on its own if you come in flat. The Report will guide the markets regardless of technicals, but right now for December Corn I see a pullback to $4.65 and in December Wheat I have a pullback objective range from $6.00 - $6.10. Finally, the July '11 - December '11 Corn Spread is broken out this morning on its Bearish reversal pattern that provides and objective of 31 1/4 cents premium the July.

Buy Bean Oil vs. Sell Soy Meal (December Bean Oil - December Meal to chart)- With the report tomorrow I think it is best to wait until tomorrow to look for entry on the trade. Yesterdays settlement of 1408 initiated the Bullish cup and handle pattern above the 1359 breakout with a target of 1693 now. The differential though has not produced good follow through this morning as Bean Oil has taken the Bean Complex break harder than the Meal. The execution ratio is 5 Bean Oil: 3 Soy Meal. If the differential settles higher today and is not damaged on tomorrow's open then I believe you can look for execution on the strong technical trade tomorrow morning.

Notes:

Update on the Combination Trade From Last Wednesday's Letter-

Based on my fundamental opinions after last Tuesday's FOMC announcment I provided a combination trade as a trial run, but that was too tricky to recommend actual execution on. While it was based on fundamentals it also looked to have a fairly close hedge while taking advantage of the technical leaders and laggards within the correlated macro markets. The trade suggestion with execution at 8:30 am last Wednesday was as follows:

Long - 4 Nasdaq @ 1977.50, 2 Bonds @ 132.28, 1 Gold @ $12.965, 1 Silver @ $21.875

Short- 1 Copper @ $3.5415, 1 Crude Oil @ $75.61, 4 Dollar Index @ 79.93, 2 Canadian Dollar @ .9729

Although I did not provide an in depth description of my thinking for time purposes last week it follows along the lines of my post-FOMC analyis of "Bullish Fixed Income, Bullish Gold, Bearish Dollar, Neutral Equities and Physical Commodities". As Silver was stronger than Gold I executed 1/2 the Gold position in Silver. The Nasdaq was a market strength while Crude and Copper I believed were correlated weaknesses, so long the Equity and short the weaker physicals. The Canadian Dollar was the weakest of the Foreign Currencies so it seemed the most appropriate hedge on a Dolar position. And, overall the combo was rather hedged as it was directionally inconsistent based on the macro correlations.

Based on the market values at roughly 6:05 am today the trade is profitable by a total of $10,325. My original suggestion was for at least 2 weeks on the trade and I still feel comfortable having the trade on for 1 - 3 more weeks, so I will provide another update next Wednesday.