MB Wealth Weekly Commentary (01-05-2009): Financials, Curencies,Softs

They say it’s not how you start but how you finish, but if the start of 09’ is any indication of how commodities will act this year, investors that have not positioned a portion of their portfolios in commodities may again be disappointed. It’s too early to make any bold predictions and the fact that we have a new administration in just over 2 weeks, we will not hold to much credence on dramatic moves in the month of January. This month should be used to evaluate how we did in 08’ and figure out how we want to be positioned in the coming 11months. We will hope to shed some light on this with our 2008 review which should be published this week and our 2009 outlook which will be published next week.

Financials

Stocks: The flow of money is moving from what worked in 08’, treasuries, to what did not work in 09; equities. Given the breadth of the recent move and the VIX coming down we could get some follow thru in the short run. We can get a better assessment as volumes should pick up after the shortened holiday week. This move is not the beginning of the next bull market, but simply an Obama rally that could last another 2 weeks. Depending on how dire the NFP number is Friday we could see the move higher stopped in its tracks. Of late the market has largely ignored bad news which is a sign that confidence is being restored with investors. We do have concern about investor’s optimism, thinking the worst may be behind us, because we are on the other end of the spectrum thinking there are many more shoes to drop with increased bankruptcies, foreclosures, company failures, dismal earnings, higher unemployment, credit card defaults, and further problems with the “Big 3.” Not to mention a bubble in treasuries, a weakening dollar, inflation returning, further turmoil in the Middle East, and a new Administration that may have new rules. One caveat is that there is record money on the sidelines that will eventually need to find a home. Last week the Dow snapped a four week losing streak to gain 519 points or 6.1% to 9035, closing above 9000 for the first time in 2 months. The S&P finished up 59 points or 6.8% to 932. The NASDAQ surged 102 points or 6.7% to 1632. Support on the Dow comes in between 8800 and 8850 with resistance at 9100. On the S&P we see support at 910 with resistance at 935 followed by 945. We expect to see a move higher, but would be inclined to fade that move as opposed to play the long side.

Bonds: March 30-yr bonds were 5’23 lower last week after 8 consecutive positive weeks. We are expecting a trade down to 130’00 from current levels which would be a 38.2% Fibonacci retracement. The recent break lower was largely telegraphed by sideways action for 7 days. We recommended to our most aggressive clients to get short bonds or to enter a NOB spread short 30-yr bonds and long 10-yr notes. Instead of gaining 5’23 ($5718.75) last week the NOB spread gained 2’01 ($2031.25). March 10-yr notes gave up just less than 3 basis points last week and like the bonds the move lower was fairly predictable. See recent posts. On the same 38.2% Fibonacci retracement prices would come down to 121’14 in notes.


We advised clients on Friday to buy 98.75 March Euro-dollar puts thinking that money may be fleeing debt instruments on both ends of the yield curve as money is put back to work in the stock market. We purchased these options for just over $300 and will be looking for an exit above $600 on a move in the futures to 98.40 or thereabouts in coming weeks.

Currencies

The March Euro was 215 ticks lower last week with prices closing 5 cents off weekly highs, looking at the weekly chart a bearish engulfing candle may imply more selling is in store. On a break of last week’s low at 1.3804 look for lower pricing. Support comes in just below that level at 1.3800 with resistance between 1.4070 and 1.4100. We favor a move to the down side but currently have no exposure.

The March Swissie lost 111 ticks last week and we saw failed rallies 2 of the last 3 weeks with prices closing 582 and 388 off their weekly highs respectively. We expect to see further selling to the .8900 level where we may explore longs. Prices closed below the 9 day moving average for the first time since the first part of December. Support is seen at .9225 and resistance at .9380.

The Aussie has been positive for the last 6 sessions and 5 of the last 6 weeks. The March contract gained 235 ticks last week and we will be looking to buy dips for clients here as we are expecting a move to .7600 in coming months. Ideally we would like to get long exposure closer to .6715; the 50% Fibonacci retracement level from the recent high/low.
The March Japanese yen lost 185 ticks last week to register its second consecutive negative week which had not occurred since August. What was support last week at 1.10 has now become resistance. Support is between 1.06 and 1.07; 1.06 being the 38.2% Fibonacci level off the recent highs and summer 08’ lows. Check last week’s trade on our blog. On Wednesday we recommended put options for $400 and by Friday we closed the position at $950 for a gain of over 130% in 2 days. “Off to a great start for commodities 1/2/9”.

The Loonie picked up 47 ticks last week which seems a bit subdued considering the action in metals and energies. We are currently on the sidelines with clients here until we see a break below .8075 or above .8325. On a move higher expect .8500 and on a move lower expect .7850.

The British pound lost 195 ticks last week and has traded down the last 3 weeks making contract low after contract low. We had suggested last week if 1.45 could hold we would explore longs, but that level has given way so we currently have no trade recommendations. The talk now is when the Euro and Pound will reach parity which we consider is a foregone conclusion. Support is seen at 1.4329; last week’s low with resistance between 1.4700 and 1.4750. We may get a bounce from here because no one thinks we can, nevertheless we will be on the sidelines. At the BOE meeting this week we expect rates to be cut 50 basis points taking rates to 1.50%.

The March Kiwi was 100 ticks higher last week. We would be a buyer on a break to the mid 50’s but currently have no exposure for clients. The interest rate differential and the fact that New Zealand is viewed as a commodity currency should bode well for this currency over the next few months, but for now we are a spectator.

Support is seen at .5600 with resistance at .5900.

The dollar index gained 98 ticks last week closing 238 ticks from the lows. On the weekly chart we see a bullish engulfing candle and we should see follow thru buying this week to confirm. The key remains the 100 day moving average which currently sits at 82.85. The dollar has made 6 attempts to close above this level, but to date have been unsuccessful. On a close above this level look for a trade up to 84.25 and potentially 85.50. Support is seen at 81.25.

Softs

March cocoa jumped $86 with ongoing concerns about the size and quality of the current cocoa and further civil unrest in the Ivory Coast. Last week’s trading range was $232 so timing your entries and exits is key to ones success. We have experienced selling at the highs the last 3 weeks so the market may be tired and need to take a breath. We initiated a bullish option play last week for clients in March with a target of 2844 in the futures market in the coming weeks where there is a gap in the chart from August.

March sugar closed up 85 ticks or 8% helped by expectations for a world production deficit in 09’. Support is seen at the 20 day moving average at 11.32 with resistance first at 12.05 and then followed at 13.00. We are advising clients to be long futures or to purchase the May 14 cent calls. Even though it is only the beginning of the year it appears we are already seeing fund buying, perhaps looking for value in sugar as it is one of the few commodities that gained in 08’ but still remains at a historically low price.

We are expecting a sizeable move higher over the next 12-24 months and are not against clients accumulating long dated calls building a position. Look at the October 09’ contracts. March orange juice fell .45 cents to another new contract low with central Florida looking at a warm ten day forecast as we begin 09’. Prices are now trading at the lowest levels seen since August 04’. As we said last week we would like to see a close over 80 cents soon or we will be looking to take our money out of fcoj and go elsewhere. We currently own 90 cent calls for clients as well as long futures with put protection. The few calls we bought months ago are deeper out of the money and unless we get some type of freeze will most likely be a total loss.

March cotton jumped up 2.61 cents, the highest close in seven weeks, blamed on short covering. Support is seen at the 9 day moving average at 46.87. Prices have been above this average on a closing basis since December 12th. Resistance is seen between 50 and 51 cents. It appears cotton pries are getting overbought and if we do get a break in the other grains ahead of the USDA, cotton should follow them lower.

Dow Jones Newswires continues to report that growing conditions are favorable for Brazil's coffee crop. March coffee closed up 2.65 cents last week and looking at the weekly chart we see a bullish engulfing candle. Longer term we like the idea of bull call spreads being that 09’is going to an “off” year. In addition, numerous newsletters and traders I talk to are looking for substantially higher prices but are unclear on when, so we like the idea of longer term positions. At this juncture we would only suggest light exposure. Support is seen at 1.0650 with resistance seen at 1.1400. Milk looks cheap but we trade very little of it so we are reaching out hoping to get feedback from our clients, prospective clients, or subscribers. We have seen a 50% reduction in prices since June; is now the time to buy?

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To find out exactly how we are positioning our clients in commodity futures and options, Contact us today at 1-888-920-9997

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.


Source: istockanalyst.com