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February 2009 Archives

February 3, 2009

Bulls laying a floor in Lumber?

Fundamentals

All good things must come to an end, and for traders holding short positions in Lumber futures, the end came on Friday when the most active March contract ended the day locked limit-up. Lumber futures have been the poster child for the economic recession, as the collapse in the U.S. Housing market coupled with weak credit conditions caused Lumber prices to plunge to lows not seen in over 20 years. However on Thursday, an announcement by mill operator West Fraser that it was planning a lengthy shutdown at its mill spurred short-covering buying that overwhelmed what sell orders were out there. The move higher also came after prices fell to contract lows on Thursday, on higher than average volume, which some technical traders believe might be a sign of capitulation by weak longs, which could signal the bear market may be coming to an end. Cash-connected traders reported that producers were hesitant to sell on Friday, as they were expecting higher bids on Monday due to the rising futures market. Not even Monday's release of a "bearish " U.S. construction spending report for December(down 1.4%) was enough to keep Lumber futures from trading limit-up for the second straight session in the March contract. A look at the most recent Commitment of Traders report shows that both large and small speculators are holding a net-short position in lumber futures, with large speculators net-short 1,683 contracts as of January 27th. The Lumber market is notorious for bouts of illiquidity, especially if major market news comes out. Multiple "limit" days are not uncommon, especially if speculators are mainly on one side of the market. Spread traders have noted that the wide contango Lumber prices have been in has started to narrow, as the lack of producer selling has forced traders to bid-up nearby contracts.

Technicals

Looking at the daily chart for March Lumber, we notice the sharp reversal in prices after Thursday's close at a new contract low of $137.90. Should this major low hold, a potential "V" bottom pattern may be forming. Prices are now approaching the widely watched 20-day moving average, currently near the $163.00 area, which if broken, may spur a new wave of buying by short-term momentum traders. The recent lows at 137.90 should act as major support for March Lumber, with major resistance found at the recent highs made on December 19th at $203.00.

Mike Zarembski, Senior Commodity Analyst


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February 5, 2009

Will bulls or bears be in for a "Crude Awaking"?

Fundamentals

Bulls and bears seemed to have hit a stalemate as to who will control the direction of the Crude Oil market, as prices have been confined to an increasingly narrow band lately. Any attempts to push prices below $40 are met with willing buyers trying to pick a bottom in a market that has fallen over $100 from all-time highs less than a year ago. Rally attempts have been thwarted, as lackluster demand and ample supplies have fundamental traders keeping the sell-side of their trading cards full. So what will it take to move Oil prices out of their trading range? Well, here are a few bullish and bearish factors that traders may consider to find clues as to where Oil prices might be heading. First of all, look at the direction of spread differentials for nearby futures vs. more deferred months. Currently, NYMEX futures are in a contango, where nearby futures trade at a lower price than more deferred months. This scenario usually occurs when current supplies are more than ample to meet demand and the market is "paying" producers to store the commodity rather than sell into the current market. The supplies of deliverable Crude against the NYMEX contract continue to grow, which has caused the spreads to widen. Bullish traders would want to see near-term futures begin to gain on the deferred months as a sign that near-term demand is beginning to improve. Watching the weekly EIA energy stocks report and focusing on the trend of Oil supplies can give traders a sense of how supply and demand are changing. Additionally, look for the adherence rates for production quotas out of OPEC. Although OPEC has cut production levels to deal with declining demand, it is estimated that adherence to these quotas is running about 75% or so. Some of the biggest "hawks" calling for production cuts, such as Iran and Venezuela, are among the biggest violators of their agreed upon production quotas. We should remember that these countries depend heavily on Oil revenues to fund government programs and may actually produce more oil as prices decline to keep up their cash flow-a bearish sign. Finally, watch the chart action. When markets are in a consolidation phase, a breakout above the highs of the consolidation pattern or a breakout below the lows of the consolidation on higher than average volume can be considered a sign of the direction of the next move in a market. More conservative technical traders would like to see a daily or even weekly close outside of the consolidation to further help weed out "false breakouts".

Technicals

Looking at the daily chart for March Crude Oil, we notice a market that has been making lower highs and higher lows since late last year. Notice how daily volume has steadily declined since March became the front month contract in late January. These are classic signs of a market in consolidation. Though it appears that Oil bears may be holding the upper hand, neither side can feel entirely comfortable with their positions. Major support remains at the contract lows of $38.00, with strong resistance seen at the recent highs from 1/26 of $48.59.

Mike Zarembski, Senior Commodity Analyst


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February 6, 2009

Are we in for more "stimulating" times?

Fundamentals

Treasury futures posted modest gains ahead of this morning's release of non-farm payrolls, which are expected to show the US economy losing 540,000 jobs. A much larger than expected figure in the high 500,000's could send investors running into the waiting arms of the treasury market. Whether or not Bonds will be able to sustain rallies remains to be seen. Gold and corporate bonds have stolen some of the treasury market's thunder since the beginning of the year due to minuscule yields. If the US is going to rack-up debt at an increasing pace, fixed income investors will demand a higher rate of return. While there are some supportive factors for prices in the form of the Fed's treasury buying program and expectations that China will invest its massive foreign reserves in US debt, foreign investors may be put-off by the size of upcoming auctions. If the stimulus package in front of the Senate is passed, massive treasury refundings will persist for the foreseeable future, making it very difficult for the Fed to buy enough treasuries to keep yields in check. This could also result in the Fed having to print more money, which could lead to inflationary conditions, further lessening the appeal of Bonds. With this in mind, traders may be watching CSPAN for developments on the stimulus legislation just as intently as economic data.

Technicals

The March Bond chart remains bearish, after reversing from December highs. Prices have found support at the 50 percent retracement level of 126-05.5, an area with very little chart support. If the market is unable to hold ground at the 50 percent retracement mark, the next support level would be the 61.8 percent retracement at 122-15, which also coincides with heavier chart support. On the upside, the market may have to cross 132-00 in order to regain positive momentum.

Rob Kurzatkowski, Senior Commodity Analyst

February 9, 2009

Are we in the midst of "over stimulating" the economy?

Fundamentals

It seems all we hear from the news media is the continued "gloom and doom" facing the world economy. On Friday, the larger than expected rise in the unemployment rate to 7.6% and the loss of nearly 600,000 jobs in January gave President Obama further ammunition to propel Congress to pass an economic stimulus bill estimated at around $900 billion. The U.S. is not alone in trying to pull out all the stops to contain the worldwide economic malaise, with major economic powers lowering interest rates, propping-up troubled banks, or coming up with economic "stimulus" plans of their own. Though it appears that current actions put in place by our elected officials have been ineffective so far, let us take a step back and remember that there can be a lagging effect for any stimulus to filter its way through the economy. So what could happen if all this major intervention ends up "over stimulating" the economy? One word-Inflation! You remember inflation, that buzz word the media was infatuated with less that 1 year earlier when Oil was sure to head to $200 and commodity investing was all the rage. Just like the Fed was blamed by some market pundits for sparking the housing bubble by lowering interest rates to 1% following 9/11, it will be interesting to see what transpires once the "credit crunch" abates and the full effect of lower interest rates and huge sums of liquidity starts to work its way through. Since markets tend to be forward looking, it is interesting to note that members of the "precious metals" sector are all trading well off their recent lows, with even the more industrial of these, such as Platinum, once again hovering near the $1000 level, despite the continued decline in auto production due to weak sales. The Lumber market has also staged a bit of a recovery after falling to 20-plus year lows on the back of a continued decline in new housing starts. Some of the recent price gains could be tied to decreased production, as weak demand has forced many companies to shut-down or curtail production. But we should remember that once production is cut, it usually cannot be re-started quickly, and the potential for shortages in many commodities is quite possible once demand begins to build. Though it is hard to fault the efforts being taken to improve the current economic climate, one has to keep in the back of their minds if the current treatment of an ailing economy may lead to more serious complications down the line!

Technicals

Though there are many charts to focus on today, I would like to look at the daily chart for March Copper. Since Copper is one of the most widely watched of the base metals complex, movement in Copper prices could be a harbinger of things to come. Notice how the market approached the upper band of the recent trading range on Friday. Volume was extremely heavy, as prices rose to multi-month highs on the same day that the horrid employment figures were released. The 14-day RSI made a multi-high reading as well on Friday. The Commitment of Traders report shows speculators are still holding a net-short position in COMEX Copper, and should prices stage a break-out above the recent trading range, we may see quite a bit of short-covering buying emerge. It will be interesting to see how the commodity markets, including Copper, react should a stimulus package agreement be announced this week, especially given the recent recovery in prices. The next major resistance point for March Copper is seen at 1.7335, with support at the lows of 2009 at 1.3715.

Mike Zarembski, Senior Commodity Analyst

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February 10, 2009

Will the USDA report "amaize" Corn traders?

Fundamentals

Corn futures are little changed ahead of today's USDA supply and demand report. The report is expected to show the 2008-2009 carryout rising to 1.838 billion bushels, up from the 1.790 billion figure in the January report. With recent reports showing a sharp decrease in demand, traders have, for the most part, already priced-in bearish demand. That being said, it is unlikely that the report will show a low enough demand component to shock grain traders. The last three weekly export sales reports have eclipsed the 1 million metric ton mark, which is encouraging, but still remains well behind the pace of the previous marketing year. Firmer prices because of the strong export demand is a catch-22 for the market, as an up-tick in Corn prices could result in weaker demand. Domestic demand in the form of ethanol and feed demand need to significantly improve for traders to shift their bias to the bull camp. Ethanol plants around the country have been shutting their doors, unable to sustain their operations due to low demand and razor thin margins. Also, with the lowest cattle on feed numbers in 50 years, it is unlikely that feed demand will be able to lift prices. The market has largely priced-in a much smaller Argentinean Corn crop due to poor weather conditions. Estimates range from a reduction of the crop size by 1/3 to 1/2 of last year's 650 million bushel figure, which has helped avert a complete collapse in Corn prices. Today's supply and demand report is not expected to contain any shocking data, barring another severe cut in demand. The longer-term focus for traders will be the March 31st planting intentions reports. The expectation that Corn acreage will be severely cut because of unattractive pricing, high planting costs and low demand may buffer the downside until the report's release.

Technicals

Turning to the charts, March Corn continues to trade range-bound between 3.50 and 4.00. The 3.50 area may be more a significant level for traders, as contract lows would be the next logical stopping point for the market. For the market to gain upside momentum, prices would need to cross the 4.50 threshold. Short-term bias may favor the upside, as the momentum indicator is showing bullish divergence from the RSI indicator. Also, the 20-day momentum appears to be on the verge of crossing the zero line, hinting at a positive bias. As is typically the case, you can throw technicals out the window after the release of USDA data until the market normalizes, which can take days.

Rob Kurzatkowski, Senior Commodity Analyst

February 11, 2009

Bears going "Hog Wild"!

Fundamentals

Rallies in Lean Hog futures continue to be few and far between (despite yesterday's short-covering rally), as low export demand combined with higher than expected production have weighed on prices. China, who was a major buyer of Pork in 2008, is expected to cut-back on its purchases this year, as its domestic hog inventory is expected to climb by over 6% from year ago levels. The strength in the U.S. Dollar is also hurting U.S. exports, as buyers look to other producers such as Brazil or the European Union for their needs. Meat packers have been hesitant to bid-up Hog prices, as weak demand has allowed current slaughter rates to more than meet demand. Current low prices may force producers to continue to cut production, as many are now unprofitable given current cash prices. Any cut in production may, in turn, be a catalyst for higher prices later in the year, as lower supplies combined with the potential for increased demand -- especially once the effects of any economic stimulus package move through the consumer level -- could break the market's current slump. However, until cash market prices improve or at least begin to stabilize, it may take some convincing for speculators to go "Hog Wild" and attempt to finally forge a bottom in this market.

Technicals

Looking at the daily chart for April Hogs, we notice prices continuing to bounce off the recent lows near 60.00. It appears that yesterday's rally may be a sign that traders have found some value below $60 and we might be moving towards more sideways trading action. The 14-day RSI has just moved out of oversold territory with a current reading of 42.12. There is also a bit of a bullish convergence forming in the RSI, which may have been confirmed with yesterday's rally. However, until we see a daily close above resistance at the recent highs of 63.25, it is too early to say a near-term bottom is in place. Support remains at the contract lows of 59.80.

Mike Zarembski, Senior Commodity Analyst


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February 12, 2009

Land of Confusion

Fundamentals

Treasury Secretary Geithner was expected to provide clarity on exactly how the Obama administration was going to deal with the banking crisis. Instead, he gave a long-winded speech reflecting his personal ideology and stated that the administration will be aggressive with no specific details. This shocked the equity and economically sensitive commodity markets, while sparking a rally in defensive instruments, i.e. precious metals and treasuries. The Bond market seemed poised to sell-off before the week began, as the government was issuing a record amount of debt this week. Yesterday's 10-Year Note auction, however, showed bond investors still have a surprisingly strong appetite for US debt. There were worries that dealers would shy away from purchasing notes after the stimulus package was approved by the Senate, which will increase the size of upcoming Note and Bond issues. The Street has been suspect of the stimulus package, as it includes too little in the way of tax cuts and too much in the way of government spending. Why, then, should Bond investors offer the US government cheap financing? Fear seemed to trump the skepticism that the Bond market will be able to digest the massive amount of debt. Today's 30-Year Bond auction may receive the same warm response that the 3-Year and 10-Year Note auctions met in prior days, which can be seen as bullish for Bonds in the short-term. It is difficult to see upcoming auctions receiving the same response that this quarterly auction did. The equity markets will dictate the direction of the treasury markets in the near-term, as the inverse relationship between the two markets seems to have been restored after the Bond market's huge sell-off in January. A relatively stable greenback may also act as support for treasuries, as they would be the logical place for overseas investors to park their money.

Technicals

Turning to the March Bond chart, the market seems to have found support near the 50 percent Fibonacci retracement. After dipping below the level on Friday, the market did not see enough downside pressure to confirm a downward breakout. Instead, Monday's price action formed a spinning top, suggesting Tuesday's rally may have been aided by technical buying. Prices have crossed above the 18-day moving average in early trading this morning. If prices are able to hold the average, it suggests that a near-term low may be in place. On the other hand, failure to hold the average would be seen as a psychological defeat for bulls, and prices could once again test the 50 percent retracement level. Momentum is showing sharp bearish divergence from both price and RSI, hinting at a possible reversal in upcoming sessions.

Robert Kurzatkowski, Senior Commodity Analyst

February 13, 2009

Going for the Gold

Fundamentals

It is not just the motto for aspiring Olympic athletes, but apparently jittery investors and traders as well, as the yellow metal has soared to highs not seen since July. Gold is benefiting from investors' lack of confidence in the leaders of the major world economic powers having a solid grip on how to end the economic malaise we now face. This flight into Gold became more apparent after U.S. Treasury Secretary Timothy Geithner failed to provide specific details on the U.S. Government's plan to deal with the economic crisis. In addition to being a store of safety during turbulent economic times, Gold is also used as an inflation hedge. Though it may seem strange for traders to buy Gold in a deflationary environment, we must think of what may happen once all this liquidity being pumped in from major world central banks finally works its way through the world economy. In addition to the psychological reasons for owning gold, there are actually some bullish fundamentals as well. Gold supplies out of South Africa fell once again, with output down by almost 18% in December. Also supportive was the growing interest in Gold ETF's, with the largest of these funds, the SPDR Gold Trust (GLD), increasing their holdings to a record 935.09 metric tons. So until traders and investors start to feel confident that the worst of the economic turmoil is behind us, the lure of Gold will continue to be a beacon for those looking for a safe haven in this stormy investment climate.

Technicals

Turning to the daily chart for the lead month April Gold contract, we notice that since forging a near-term low of $803.60 back on January 15th, Gold has rallied nearly $150 per ounce, which happens to coincide with an intermediary high in Treasury Bond futures. It appears that traders flocked back into Gold as fears of the massive size of U.S. Government borrowing sparked concerns of a longer-term inflation uptick. Prices remain well above the 20-day moving average, and momentum looks strong. However, there may be a bit of a bearish divergence forming in the 14-day RSI, which could be signaling prices have run-up too far too fast and a pull-back might be forthcoming. The next resistance point for April Gold is seen at the milestone $1000 level, with support found at the 20-day moving average currently at $895.00.

Mike Zarembski, Senior Commodity Analyst


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February 17, 2009

Devaluing their way to prosperity?!?

Fundamentals

What a difference a year makes. In early 2008, the Swiss Franc and Japanese Yen were among the favorites of the hedge fund set, as "borrowing" currencies for putting on so called "carry trades", where one buys a high yielding currency and sells a lower yielding currency. The goal of the trade is to capture the yield difference and hope the price movement on the long side of the trade remains steady or increases vs. the short side of the trade. However, all that changed, starting with the fall of Bear Sterns in March of 2008 and continued through today, as traders rushed to cover their large positions in these trades as a more "risk adverse" trading mentally is in vogue. The up-shot to this rush to cover was the sharp rise in the value of the Swiss Franc and the Japanese Yen, as traders bought back the short side of the carry trade spreads. The rising currency has wreaked havoc on Japanese exporters, as the strong Yen hurt profits from overseas sales. The currency rise could not have come at a worse time for Japan, which has been struggling for a decade from a deflationary spiral. There have been rumors throughout the FX community that the Bank of Japan would need to intervene in the FX market by selling Yen to attempt to weaken the currency. Though there have been no signs of this occurring so far, even the possibility of BOJ intervention has traders nervous of holding a large long Yen position. There has also been talk that the Swiss National Bank (SNB) may enter the Forex market, but that option is considered more of a long shot. This weekend's meeting of the finance minister of the G-7 nations did nothing to stop the rise of the Yen or Franc, as no mention was made of helping Japan to weaken its currency. In fact, comments that the economic slump will continue throughout most of 2009 only helped to initially strengthen these currencies, as traders continue to flock to more conservative investments. Though the rise in the Yen and Franc may still have some room to go, it may not be long before the pain of a strengthening currency on its exports forces the central banks of Japan and Switzerland to cry "uncle" and intervene in the FX markets.

Technicals

Looking at the daily chart for March Yen, we notice what may turn out to be a double-top formation from the December 15th and January 21st highs. Prices have also fallen below the 20-day moving average, and the 14-day RSI is becoming weak. The January 6th lows of 1.0567 should act as major support for the March Yen, with the contract highs of 1.1496 being major resistance.

Mike Zarembski, Senior Commodity Analyst


February 18, 2009

Crude Reality

Fundamentals

Crude Oil futures are little changed this morning, after dropping sharply with the equity markets yesterday. The G7 meeting this past weekend was dominated by pessimism and confusion. The leaders of industrialized nations were unable to come close to any sort of agreement on how to deal with the deepening global economic crisis. Japan stated that its economy shrank at the fastest pace in over 33 years in the fourth quarter, dampening the prospects of a demand revival for the third-largest petroleum user. Energy traders are now suggesting that the IEA's forecast showing world Crude Oil consumption falling by 1.2 million barrels a day may be a conservative estimate. Even if the estimate were aggressive, the production cuts by OPEC only amount to roughly half of the decline in demand. The cartel must now weigh their options. If further cuts to production are made, prices could stabilize more quickly, but price increases could stymie efforts to get global economies back on track. This short-sighted strategy could easily backfire on the cartel. On the other hand, prices risk falling into the abyss if nothing is done. On the geopolitical front, the strong rhetoric between Israel and Iran has cooled in the past week, due to election turmoil in Israel. Nigerian rebel group MEND has threatened Italian Oil operations in the country, and could forcibly cut the flow of high quality Crude Oil from the African nation. The group has made good on threats in the past, and there is no reason to believe it will not do the same this time around if it chooses.

Price action on Friday was rather unusual, with the front-month March contract posting rather sharp gains, while back month prices fell. This suggests traders may have unwound their long back-month short near-month spreads to take advantage of the contango, which had reached $16 (1 to 5 month) at one point last week. The weakness of the back-months relative to the March contract continued to a much lesser degree yesterday. The Crude Oil ETF United States Oil Fund (ticker USO) rolled a good portion of their positions forward last week, which explains why traders pushed the monthly spreads so wide. It is never a good idea to telegraph what your intentions are to the market, especially when you are rolling a sizable position, as the fund managers learned last week. The contango remains at irrational levels, giving traders with financing and storage the ability to earn handsome, risk-free profits by taking delivery and selling deferred contracts to re-tender at a later date. Logic would suggest that this spread should narrow, especially given the grim economic outlook, but logical trades can backfire severely if not timed correctly (think tech or Crude Oil bubbles). Illogical situations can last months or years, making spread trading just as treacherous as trading the outright futures contract.

Technicals

The April Crude Oil contract took-out the December 24th low at 39.82, which can be seen as a downside breakout. The March contract had previously taken-out this level, but deferred-months remained strong relative to the front-month contract. It would not be surprising to see the market come back to test this freshly established resistance level in order to verify the downside breakout. Momentum has remained strong, despite the sharp dip yesterday, and is now diverging from both price and RSI. This hints at possible near-term strength.

Rob Kurzatkowski, Senior Commodity Analyst

February 19, 2009

Investors "flight to safety" has been noted!

Fundamentals

Just when some traders were looking to call a top in the Treasury futures markets, prices for the most active March 10-year note futures have staged a comeback, as continued economic uncertainty -- despite the passage of the massive "stimulus" bill -- and a weakening U.S. stock market have put a bid into the U.S. debt markets. Even more surprising was the fact that the recent rally came in front of the government announcement on the size of the next auction of 2, 5, and 7-year notes. Current estimates are for the auctioning of nearly 100 billion of these mid-term notes in next week's auction. Despite the large amount of government borrowing, it appears that traders are more focused on the continuing weak economic data being announced almost daily. Just yesterday, the Federal Reserve announced that U.S. industrial production for January fell a worse-than-expected 1.8% in January, and they revised December's figures to a 2.4% decline. Capacity utilization fell to its lowest levels in 26 years to 72.0%. This morning we will get the jobless claims figures for last week, with estimates of new claims for unemployment totaling 622,000 last week. There are signs that China, currently the largest holder of U.S. Treasuries, might be looking to cut back on its purchases of U.S. debt and use part of its vast currency reserves (about 1.95 trillion) to purchase strategic assets, such as oil and precious and industrial metals. Until we start to see some stability in the U.S. and world equity markets and some signs that the worst of the economic crisis is behind us, there will continue to be investors moving into Treasuries, hoping to at least preserve their capital until conditions improve. However, once that occurs, there could be extreme selling pressure, as funds are moved into "riskier" investments and the possibility for an historic top in Treasury prices in the next several months might not be farfetched.

Technicals

Looking at the daily chart for March 10-year note futures, we notice that despite the recent recovery in prices, the market is still making lower highs. The recent rally above the 20-day moving average looks in jeopardy, as follow-through buying usually seen by short-term momentum traders has failed to materialize. This combined with large speculative accounts cutting-back on their short positions last week seems to suggest that the recent rally was the result of short-covering and not fresh buying. Volume has remained steady the past several weeks, and the 14-day RSI is currently neutral, hovering right around the 50 level. Major support is seen at the February 9th lows at 121-095, with resistance seen at the recent highs made on January 28th at 124-30.

Mike Zarembski, Senior Commodity Analyst

February 20, 2009

Modification Mess

Fundamentals

The equity markets are lower once again this morning, as traders show their displeasure with the government's handling of the economic crisis. CNBC host Rick Santelli may be calling for a "Chicago Tea Party" in July, but equity traders have already jumped the gun and begun dumping shares into the Hudson. Joking aside, the host's opinion is echoed by many economists and the general public alike. The Obama administration's plan to force banks to lower interest rates and, in some cases, reduce the principle amount of loans will do little to help the slumping housing market. The plan may cost much more than earmarked, as it would likely undermine the bank bailout program - a program many traders didn't like to begin with. Struggling banks will look to make up the lost value of these loans by charging unusually high interest rates to credit-worthy borrowers on new loans. This may cause house hunters with good credit to avoid looking for homes, which in turn, could result in a slow, grinding bottom in the housing slump. The quicker we reach a bottom in housing, the quicker the market will recover. It goes to show that thanks to government intervention, while well-intentioned, the plan may not result in economic progress, but rather undermine the foundation this economy was built on.

Bank of America CEO Kenneth Lewis was subpoenaed by New York Attorney General Andrew Cuomo regarding the acquisition of Merrill Lynch. The news has sent the bank's stock tumbling. Doom and gloom continues to hang over the auto sector, as GM subsidiary Saab filed for creditor protection. The government is still weighing its options on how to structure a bailout of GM and Chrysler, hoping that throwing taxpayer money at the problem will fix decades of mismanagement and union muscling. Economic data released this week was very poor, with housing, unemployment and manufacturing data all coming in weaker than expected. Today's only major economic release is the CPI indicator, expected to show a very mild 0.3 percent rise in the overall figure and a 0.1 percent increase in the core reading. Today is equity option expiration, which means the market could be more volatile than usual.


Technicals

The March E-mini S&P chart is quickly approaching November lows. Unlike the mini Dow, which covers a much narrower spectrum of stocks, the S&P was able to avoid breaking these lows in overnight trading, which may be somewhat encouraging. If the S&P is unable to hold this key support area, the index may not find support until it hits the low 600's. Momentum is showing strong bullish divergence from both price and RSI, hinting at some near-term strength. Prices may have to push through the 800 level to the upside in order to fall back into the range seen over the past three months.

Rob Kurzatkowski, Senior Commodity Analyst

February 25, 2009

No quick relief for bloated Natural Gas supplies!

Fundamentals

Though overshadowed by Oil, another member of the energy complex, Natural Gas, continues to slump, with prices hovering near 6-year lows. The nearby March and April contracts briefly fell below the $4 per 10,000MMBTU level for the first time since 2002, as supplies in storage remain well above the 5-year average. Last Thursday's release of the weekly EIA gas storage figures surprised nearly every analyst when it was reported that a mere 24 billion cubic feet (bcf) of gas was removed from storage last week. This was well below the average pre-report guesstimate of a 54 bcf draw, and also well below the 5-year average of a 155 bcf draw. Total gas in storage now totals 1.996 trillion cubic feet, or 8.4% above the 5-year average. Natural Gas has been a victim of increased production at a time when both industrial and consumer demand has declined. The U.S. Department of Energy is predicting just over a 5% decline in industrial demand for gas in 2009 at the same time production increases. The old trading adage that the "cure for high prices is high prices" also tends to work in reverse, with low prices forcing major gas producers to cut back on expenditures for bringing new production on-line and postponing investment in future exploration. This could make having adequate supplies available more vulnerable to potential supply shocks like hurricane damage or extreme temperatures later this year. This does not even include an increase in demand once the economy begins its recovery and industrial demand begins to ramp-up. Though judging by all we hear and read in the news these days, that event may never happen. However, should demand begin to increase and new supplies begin to lag, Gas bulls may break out of their pens and become difficult to reign back in!

Technicals

Looking at the daily chart for April Natural Gas, we notice prices have fallen by over 2/3rds from the highs made in July. The brief attempt at a rally two weeks ago failed to find new buyers, despite a brief close above the 20-day moving average. The 14-day RSI has fallen well into oversold territory with a reading of 26.42. The Commitment of Traders report shows large speculators adding to their already large short position in Natural Gas as of February 17th. Small speculators are net long Natural Gas, averaging down their position as prices fall in an attempt to pick a bottom. This market is a classic example on the psychology of these two types of investors, with large speculators tending to be trend followers and small speculators tending to try to pick tops or bottoms in a market. The next support point for April Gas looks to be near the 3.80 area, with resistance found at the February 9th highs of 4.922.


Mike Zarembski, Senior Commodity Analyst


February 26, 2009

Blemished?

Fundamentals

Gold futures have fallen hard in recent sessions, amid news that investment demand for the yellow metal has begun to slow. At least that's what data released by the SPDR Gold Trust (GLD) shows, after holdings have stalled at a record 1,028.98 metric tons since February 19th. This may actually be a somewhat deceiving gauge of investor sentiment, as some investors have switched their holdings of GLD for mining stocks. In the past week and a half, the Wall Street Journal and several other respected publications have touted mining stocks' superior returns compared to Gold ETFs and futures. Investor sentiment has become extremely bullish for Gold - too bullish for some. With Gold prices once again eclipsing the $1,000 an ounce mark, bullish sentiment and the wave of euphoria among Gold bugs gave funds an opportunity to take profits with the knowledge that there would likely be enough buying interest to safely exit the market for the time being without pushing prices too far down. Other factors also played into this correction. The extremely bullish sentiment also happened to coincide with technically overbought conditions. While the Dow has taken out November lows, the broader-based S&P, Nasdaq and Russell 2000 remain above their key lows for the time being. This is hardly encouraging news for stocks, as key support remains within earshot, but it may be enough to give traders some hope to cling to. The World Gold Council also reported robust demand for Gold jewelry last year in the Middle East, but a deeper look into the figures shows demand rising very modestly at the end of the year. Indian jewelry demand has also faded, which has troubled some market observers.

Given the great uncertainty surrounding the economy, the value of Gold as a safe haven investment has not faded. What has been somewhat peculiar is the fact that prices have fallen so sharply after President Obama's speech to Congress outlining some very bold economic plans, including a $634 billion health care fund. It seems that with each passing day, the US government adds to the swollen deficit and expects to make up for these shortfalls by simply increasing taxes for those in the upper income brackets. This does not bode well for the economy or the stock market. There also seems to be dissent between the executive branch and Fed Chairman Bernanke on how the banking crisis will be handled. The administration is weighing the option of nationalizing banks, but the Fed Chairman has spurned the idea. This is very early in the President's tenure, but he will have to find some way to get everyone on the same page and stop sending mixed signals to the market. Failure to do so could be considered bullish for precious metals. The swelling deficit may cause treasuries to lose their appeal as a safe haven investment. The economic uncertainty around the globe has been positive for the greenback, as traders have been flocking to Dollar-denominated assets, but devaluation via falling treasury interest poses a significant risk of sparking inflation if and when the economy gets back on track.

Technicals

The April Gold chart now shows major chart damage as a result of heavy selling pressure. As previously noted, the RSI indicator was giving overbought readings, which may have contributed to the correction. Prices are quickly approaching the 18-day moving average. A close below the average would suggest that a recent high may be in place. The April contract may also be attempting to confirm an uptrend line. Failure to confirm this uptrend suggests prices may come down further to test a far less steep uptrend. For the market to maintain its upward momentum, prices must stay above support at 928.40. Momentum has fallen to a lesser degree than both price and RSI, suggesting the market may be poised to turn back upward.

Robert Kurzatkowski, Senior Commodity Analyst


February 27, 2009

No economic slump for Sugar prices!

Fundamentals

Sugar futures must have their blinders on, ignoring the slumping stock market and surging to nearly 5-month highs. Fundamentals have sweetened for bullish traders, with the International Sugar Organization forecasting a 4.3 million ton deficit for the 2008-09 crop year, up 0.7 million from its previous forecast. The world's largest consumer of Sugar, India, is expected to become a net-importer of Sugar, as lower production may force the country to export as much as 2 million tons this year. The recent recovery in Oil prices may also be a factor in rising Sugar prices, as higher fuel prices could spur increased cane ethanol production out of Brazil, which would limit the amount of cane available for Sugar production. Speculators, and especially large traders, have really embraced the long side of the Sugar market according to the most recent Commitment of Traders report. In the report, large non-commercial traders were holding a net long 130,000 contracts as of February 17th, up 6,254 contracts from the previous week. This is not surprising, as many of these traders are "trend followers" and will add to positions as prices move in their direction. Commercials are on the other side of these positions, holding a net short 146,104 contracts. The biggest fear for Sugar bulls could be the potential for withdrawals from "long only" commodity funds. This would force the liquidation of positions not only in Sugar, but also across the commodity spectrum -- especially if the economic slump continues and the need for liquidity increases.

Technicals

Looking at the daily chart for May Sugar, we notice the downward correction earlier this week was put to a halt on Wednesday. This may have been tied to the sharp rally in Crude Oil futures, after the bullish EIA energy stocks report. Prices accelerated to the upside once the previous resistance at 13.64 was broken. Prices are above both the 20 and 100-day moving averages, which is deemed bullish by both long and short-term traders. The 14-day RSI is strong, with a current reading of 66.02. Besides the psychological resistance at 14.00, the next chart resistance is seen at the September 26 highs of 14.92. Minor resistance is found at the 20-day moving average currently at 13.25, and major resistance at the recent lows of 12.91.

Mike Zarembski, Senior Commodity Analyst