Wednesday 12/8/10 Commodity Ideas

Opening Note:

Yesterday
Early morning yesterday the market was full of green shoots. The Equities were making new yearly highs, Gold and Silver were on a tear, and even the Euro did not look that bad. News was recently released, confirming that Obama would push to extend the Bush tax cuts. What could go wrong? Well, I am not sure you can exactly pin the sell off on one factor, but straight from the Crude Oil open at 8 am it was clear that something was amiss. Macro liquidation continued throughout the morning and again in the last hour of stock market trading. From 8:30 am - 3 pm the laggard sectors were the Energies and Metals, with Silver and Crude Oil the worst performers. Of further interest was the awful performance by the Treasury markets. Often the run to safety on macro liquidation, the Treasuries were weak throughout the morning and putrid after the 3 year note auction at noon.

I want to make sure that I make special note of what could be the beginning of a trend between the Physical Commodities and the Equities. The Physical Commodities experienced strong liquidation in the morning, with almost all of the previously strong gains of the session turning into losses. While all this was happening though the Equity markets merely shrugged and held at least moderate gains well after noon. Granted the Equities finally fell apart around 1:45 pm, but their fall was minor in comparison to the other Sectors. There are a number of fundamental reasons this relationship shift could occur such as the stock market is under-invested in portfolios, China truly takes steps to curb inflation, or Commodities are flat out overbought on stimulus money. Regardless though, the truth is that Commodities move much more than the stock market on a percentage basis over almost any period of time, especially daily. I think that it will be important from today to keep a close eye on the idea of going long Equities versus a short position in the weaker Commodity markets.

A month ago when the Euro began falling apart I suggested setting a row on your quote board devoted to Individual Commodities vs. the Euro. I now recommend also adding a row of Individual Commodities vs. the S&P 500 or Nasdaq (S&P 500/Commodity to chart). These ratio charts follow the Commodity market chart more closely, but are still different in nature. I am already very interested in the rangy S&P 500/Crude Oil as well as the possible negation of the long trend on the S&P 500/Silver.

Today
When I woke up this morning the market was rather weak, but has now turned into sort of a modestly weaker mixed bag. The Equity markets are clinging to the slimmest gains while the Physical Commodities are lower in general (I'm noticing a trend here...). Gold and Silver appear to be the laggards based on their 12:30 pm settlement yesterday, but most of this damage was done yesterday afternoon between the Metal settlement and the stock market settlement. The Bond market has rebounded from its plummet and is now higher on the day as the yield curve is shifting today in favor of the long end. Lastly, the Dollar is higher currently on a slightly lower Euro. I want to make certain though that yesterday's liquidation, nor today's movement was led by or caused by the Dollar. The Euro was one of the last market's to break significantly. If anybody tells you different put in your ear plugs or change the channel.

The beauty about writing my own solo newsletter is I have the freedom to change my mind whenever I see fit. Yesterday I said I believed the rally would last another 7-10 days. This was after the previous week I believed that we would trend lower. I do not regret either call because that is honestly what the market was saying. The market has flip-flopped the range with volatility several times the last few weeks, but I now have concerning technical signals that span across nearly every Sector. I am not going to say that we move a particular direction with conviction, but there are enough red flags for the macro market right now that I no longer feel comfortable holding long positions for an extended period of time. I will detail below, but I have a multitude of daily chart Stochastics crossovers that are near or already confirmed in and around overbought territory. The market will obviously waver back and forth, but I am more concerned about a break in prices across the board heading forward.

Buys to Watch:

Sells to Watch:

Put on the Radar:

Markets Near or With Daily Stochastics Crossovers- Every Grain market (including the whole Soybean Complex), Every domestic Equity Index, Every Metal (Gold, Silver, Copper, Palladium, Platinum), Sugar, Australian & Canadian Dollars. Nearly all of these are in or near overbought territory. They also are rather strong swings in the Stochastics cross that are less likely to produce fake outs when initiated (lets exclude the above Currencies from this statement for now. Soybean Meal, Crude Oil, and both Gold and Silver are already crossing this morning. They could become the first confirmed sell signals as well as the initial laggard markets.

Bonds, Reached the Objective...Reversal?- The Bonds made quick work of reaching my 122.00 objective and have since found some support around this level. The Treasury markets are weaker in general today, but the Bonds are the leader market among the sector by a mile. I recommend taking profits and no longer holding a short position in the market. I believe that the Bonds will produce a reversal bottom around this level, so the next recommendation on the horizon will be a Buy.

S&P 500 Loves 1225- 1225 is the magnet that the market keeps coming back to. Four days in a row now the market has either found a high or spiked around this level, yet can not seem to settle higher. This is also the same level from early November that produced a 3 day high and subsequent price reversal. The Bulls NEED to get a settlement above this level or find a fresh catalyst soon because the time window on the rally is closing. The technical indicators are very near producing sell signals and possibly will by tomorrow. I am clearly concerned about the Physical Commodities ability to hold prices and this also goes for outright positions in the stock market. I still like this as a possible long position as a spread against a weak Commodity though.

Grain Markets Closely Tracking Macro Direction- This usually happens more when we get out of growing season. With long term issues with the Grain Supply/Demand though the Grains have followed their own stories for most of the Fall and Winter. Yesterday though I observed two instances on both the morning and evening close when the Grains appeared in tune with the macro story. Because the Grains are closed between 7:15 -9:30 am and 1:15 - 6 pm, when most other markets are open, there is a window of time that the Grains are unable to account for the macro picture. I speculate that both breaks on the Grain opens yesterday were caused by large price breaks among the rest of the market while the Grains were closed.

One of the driving fundamental reasons this correlation to the outside sectors to the Grains has tightened is that Chinese demand for Grains is probably the largest price driver for the Grains currently. Now that Chinese inflation policies are widely affecting the broad market the correlation has tightened. When this correlation is tight and there are large moves in Equities, Crude, and Metals while the Grains are closed this turns into literally an 80+% trade. If the others liquidate huge then sell the Grain open and take profits 5- 30 minutes later...it's that easy sometimes. It is not in play this morning so far, but watch for it in the coming weeks.

Notes: