The market had a wonderful rally, and sometimes a small break is in order. We saw a relatively slow week and very little trading range. This week we may see some profit taking because resistance at the 1015-1020 level is rather strong. This week will see retailers showing their books - which could have a dramatic effect on the market. The feel of the market has changed; many look at the overall picture of the market and not just earnings or data. This is how the old, "pre-recession" Wall Street used to act. I never agreed with this mentality, but I can't have my way on everything. To me bad is bad; not-so-bad is still bad; and great numbers or news is well, great. It's a simple mentality, but if we start to make things complicated we can easily become disoriented in a fast market. Yes, charts and data are helpful but we have to take the entire market, break it down to simple language, and trade from there. The Federal Reserve will meet this week to look at inflationary stats and possibly discuss the timing of raising rates. As you know, rates are close to zero. Adding a .50 of a point should not hurt lending rates, mortgage rates, or any other rates for that matter. We need to start thinking for the future and not just in front of our noses. Our children's children are the ones that will pay for our mistakes. How does $100,000 in debt before they are born sound? Well, it sounds crazy - but that is where we are headed folks! A second stimulus package? People are comparing our economy to that of the Japanese in the early 1990's. Okay, there are many similarities; but our country is not as stubborn and will likely not let our economy fly off the handle.
Currencies
The US Dollar index rose to 79.0, showing a resilient dollar and backing the steady rise to the stock market. I love this! A pause in the stock market over the past few days allowed the dollar to slowly gain some ground. Since the dollar is rising we know that the Euro would have to fall, which makes me equally excited. The Euro is currently trading at 1.41, showing it could possibly have a slight fall out in the near future. This could impact Europe!
Energies
Energies were up last week even after crude stockpiles rose for a second straight week as the black gold was +2.3% to close out at $70.93. Heating oil followed crude and rose even more to +4.3% as heating oil season starts its very early approach. Gasoline was the worst performer and actually fell as demand is just simply not there. RB fell .2% to close just above $2.00 to $2.0081. Natural gas rose - albeit slightly - after inventories gained on the Thursday report with prices hovering $3.6774 good for a 1.1% rise.
We got the great jobs report we needed for the US economy as July non-farm payrolls were -245k, but down from estimates of nearly 300-350k sending the unemployment rate down for the first time in a while to stand at 9.4%. After these numbers at 8:30 Friday, everything started to rally with crude trading up to $72.80. The USD played a major role in holding prices below $73 as it gained more than a penny against the Euro to trade at $1.4180. This bounce off the resistance of the Euro/USD between $1.44 and $1.45 is very significant as crude, gasoline and heating oil did not rise to their 2009 highs even after the glorious jobs number. I believe crude prices will be kept at bay here until the Euro/USD relationship goes above $1.45. Right now, crude spreads are still appearing bearish with Sep/Oct trading at -190 and the Sep arb trading at -300. It will be interesting to see if things can still keep the stock market going while holding the crude price below $73.50.
Softs
Wow, what a week! As a group, prices among the soft complex improved with a few components surging ahead. Sugar took off, finishing the week with superior gains and at fresh 28 year highs (kind of reminiscent of the piling on rally in crude last year). Coffee prices moved up almost a full 10 cents with KCU settling at 137.90. Orange juice was up 10 cents. Cotton began the week with a limit move up, dropping back mid week, yet values still improved to finish the week two cents higher. The only dark horse was found in Cocoa as prices there dropped by less than $10/ton. What made this surge in Softs unique was that it occurred without the help from a weak dollar; in fact, the contrary was true Friday (although they did receive assistance from positive improvement in outside markets, especially equities). As it looks now, the tone seems set for continued strength in what appears to be the beginning stages of a solid bull drive. The coming week ought to provide further confirmation of that - so as the saying goes, "be long, or be wrong".
Momentum is poised to power the soft complex higher. Technical breakouts are fueling additional buying and the pronounced lack of sellers is becoming increasingly obvious. Do you feel like jumping in front of a moving express? Few do, and whatever selling has been seen comes from profit takers or hedgers; but why be in a rush to abandon longs? Let it come to Papa. If one is long, why not buy puts rather than liquidate longs? If one liquidates longs it will likely be awfully difficult to feel comfortable about getting back in again. Instead, roll long puts up - at least that way one can protect profits and try to define risk doing so.
I feel a strong bull move is only in its beginning stages of development. As a result I feel it best to simply approach these markets (with cocoa being an exception) from the long side. Employ bullish strategies; and again, if one needs protection use puts.
Wednesday brings the latest USDA crop report data. While I look for no surprises for cotton (mills seem willing to be patient and dealing hand to mouth), what happens in data from other crops can and likely will influence cotton prices. Be on the alert to outside influences igniting speculative Pavlov's dog-like salivating juices. 60 cents should be supportive, but long term bulls (like me) think a pair of consecutive closes below 60 a requirement before strong consideration given to abandoning longs.
On a closing note, Sugar is powering to new highs and receiving an influx of new participants. We should see 215 in SBV this week (it's already there), but sooner or later this move ought to correct. When it does, there could be hell to pay as "Katie, bar the door" - everybody tries to leaves at the same time. Therefore, it makes sense to use partial profits to own puts as protection - call it disaster insurance. Enough said.
Metals
Precious metals were all up last week, but off their highs as gold was up .4% to $957. Silver rallied nicely up 5.2% to $14.66. Platinum gained 4% to $1,268/oz after almost touching its top of $1,300 for the second time in 4 months. Copper once again showed why we stick with the best-in-breed as this market gained 7% to close out at $2.78, just pennies off of its 2009 high for the year.
Gold and silver saw a nice rally on the Thursday session before giving back some gains as the USD rallied against the Euro. Gold recently touched $973 (which was a big Fibonacci resistance number) and has since come off $20. If one wants to invest in the precious metals I would stick with silver as it was up 500% more than the price of gold. Platinum has now made a sort of double top at $1,300 and has since given back some gains as well. Copper looks like it will test another yearly high with prices now above $2.80 in the overnight session. This market has been on a bull run for quite some time and the non-farm payrolls on Friday only helped this cause sending the market up 10 cents that day. Here are some of the economic indicators coming out this week that we should look out for provided by Yahoo! Finance. CPI data will likely be key this week.
Grains
The previous week saw messy trade as everyone gets ready for Wednesday's special report attached to the normal WASDE. This special acreage report is quite important for beans in that their yield expectation is not expected to rise as compared with corn. The general theory is that corn will lose acres to beans. The argument, of course, revolves around how much. The most intelligent estimates say 800K-1.5 million. This is not a big deal as compared with yield. To illustrate: if corn rises from 153.5-160 we gain over 500 million bushels versus a possible loss of 1.2 million acres, equating to a loss of 175 million at most. For beans, a gain of 1 million acres is nice, but this is only 40-50 million bushels. So, as proven, the change in yield is far more important.
Looking at demand we have to assume higher new crop exports for both beans and corn with China continually a major feature. One possible counter to this argument is that many countries are buying way, way forward - especially corn. This is due to weakness in the USD and low prices as compared with recent years. Only time will tell which is correct but I lean toward lower buying in the latter half of the year for corn.
World demand and production should be little changes as S. America keeps a close eye on the corn bean spread with decision time for new crop on the horizon. With this spread reaching 700 on Friday there is definite possibilities to see a massive shift out of corn into beans. This will create a counter cyclical cycle with Brazil and Argentina dominating bean production here forward while the US focuses on corn. This is far from set in stone and as we have all seen, things change quickly in commodities.
One other point worth discussing is the CFTC and Congress clamping down on speculation. Simple fact is it likely cannot happen. If they limit tradable positions via any exchange all the money will do is venture out to the OTC market with their options starting on Aug 24th. This is like the Wild West with absolutely no regulation. If congress is intelligent (which I doubt they are) they will let this fall by the wayside and allow "free markets" to live up to their names.
In closing, the WASDE report means everything. If one has high delta exposure in either direction look to hedge. If one is still bull spread any bean spreads, look to level out due to possible flush out. Overall this is a report that can change the landscape through harvest, making it quite important.
