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MB Wealth Corp. is not responsible and does not endorse anything outside of the content of this article authored by Matthew Bradbard President of MB Wealth.
As most followers recognize, I break the commodity markets into seven sectors: financials which include the indices and debt markets, energies, currencies, livestock, metals, grains and finally the softs. So let's examine sector by sector what should be on your radar as we conclude one trading year and a fresh year of opportunity is upon us.
Financials While the first part of the year brought uncertainty and perhaps too much pessimism after a bottom formed in the summer indices have appreciated lifting the Dow and S&P approximately 25%. From here, we think prices have gotten ahead of themselves and expect a 5% depreciation from their current levels. Aggressive clients have started to purchase March ES bear put spreads. Reflecting back on the year, Treasuries have had an inverse relationship to the indices enjoying trade higher in the first half of the year reaching an interim top in the summer and falling off since. The greatest loss has been in Q4, as yields have increased and 30-yr bonds and 10-yr notes have lost considerably. We expect to see a bounce into the new year and have advised aggressive clients to buy dips in 30-yr bonds, 10-yr notes or to position themselves in NOB spreads with their directional bias in the direction of bonds.
Energies There has been a powerful force lifting prices higher in crude oil and the distillates virtually all year and we see no reason for that to change. Continue to use price retracements as buying opportunities as we see $110/115 in Crude by mid 2011. Assuming we are correct with this assumption, both heating oil and RBOB would likely be 20-25% higher as well. Natural gas remains a dog unable to make any significant headway all year. There have been fits and starts but the range bound action for the last six months has been discouraging and lost my clients money on several attempts. From here we may opt to scale into long futures but we would not allocate too many funds and see better opportunities elsewhere.
Currencies From its peak in mid-June the dollar lost 15% followed by a 7% appreciation since early September. From here, there is likely an additional 2-3% upside potential before a slide south resumes sometime in Q1...only my opinion. We rarely trade the dollar but study it to help navigate other trades. Circumstances in Europe have improved but we're far from being out of the woods, so we think there could be more downside in all the European crosses in the coming weeks. If and when we get a correction in commodities, which is long overdue we will look for opportunities to gain bearish exposure in the Loonie, Aussie and Kiwi. As for what's on our radar at the moment, I see nothing pressing in this sector.
Livestock Lean hogs at their current price are in no man's land which essentially means we could go either way from here so we have no long or short interest. Both live cattle and feeder cattle have been trading higher for several months and we expect that pronounced trend to continue. We generally do not trade feeder cattle but we will be advising clients to re-establish longs in live cattle thinking we may see record high pricing in Q1. With rising grain prices and with a number of international markets that had been absent as buyers for several years coming back on line, we feel live cattle could be a great long candidate.
Metals We rarely trade copper but do track its pricing as it serves as one of the best barometers of the health of the overall economy. That being said, at a two-year high and having appreciated over 50% in the last six months I guess the international markets are getting back on their feet. Any significant price change higher or lower in copper should not be ignored. As for the two metals that we are most actively trading for clients in this sector: gold and silver we remain bullish longer term but we do expect some type of price consolidation in the immediate future. Year-to-date gold has appreciated roughly 25% while silver is higher by almost 90%. We expect this tendency to continue with silver continuing to outperform gold for the weeks and months to come. The problem with that is when you're wrong on your trade, silver will prove to be much more volatile, so recognize that when choosing your allocations. Another interesting trade clients have been involved in of late is trading silver against gold at a3:2 ratio. Pick a direction up or down that you expect in the metals and buy or sell silver and then go the opposite direction in gold. We would suggest using a trade back near $1,300 in gold and $27 in silver as buying opportunities.
Grains The trend in corn and soybeans has been higher since the summer lows, while wheat has been sideways for several months. Prices will need to trade higher to entice farmers to allocate more acres to next years crops but we would like to see a break in pricing sometime in the next 30 days to use as a long entry as clients have no exposure currently. We would explore a 30-40 cent correction in '11 corn and would like to see 50-80 cents in '11 soybeans. Until CBOT wheat breaks above $8 or below $6 we have little interest in trading anything but that range for clients. One trade idea to consider is if you think we could get a temporary price setback in either soybeans and/or crude oil aggressive traders may opt to gain bearish exposure in soybean oil. We could see a 5-8% correction over the next several months...again only my opinion.
Softs This sector never gets enough attention from traders but let's look at the scorecard. Both cocoa and sugar reached multi-decade highs this year, coffee is currently trading near a 15-year high, lumber has appreciated 35% off its summer lows and cotton this week traded at a record high. As for current positioning, we're suggesting fading rallies in cocoa thinking we could see 10% depreciation in the coming months. Sugar has very little upside resistance on a trade above 33/34 cents and some traders are calling for 40 cents this year. I am not one of them but this should be on your radar. Cotton is at a record high having gained nearly 45% in the last 30 days. Longs should be looking for an exit door as we've advised clients to start gaining bearish exposure thinking we will see a trade under a $1 in the coming months.
Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.
