Commodity Trading: Supply & Demand in Commodities
Commodity Trading: Supply & Demand in Commodities
For April 27th– May 1st 2009
By: Matthew Bradbard
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It is viewed by many that a modest increase in commodity prices is a sign that demand is coming back to the market. We need to point out demand is only one side of the equation, the other being supply. We do agree that once prices stabilize we could see further upside, as the global economy starts to digest the recent stimulus, which should lead to inflation down the road. The 2 main questions are how long and windy will that road be and how much inflation will we have? Over the years, one of the main aspects within commodities that has intrigued me is the economics, supply and demand govern the price as opposed to an executive sleeping with his assistant, a missed earnings report or a short seller with an agenda. Yes, just like any market, commodities can be manipulated but to a bigger degree these markets make sense. A hurricane, flood or drought will affect supplies and therefore price. A significant population expansion, a growing middle class with an appetite for better things; i.e. more demand should fuel a commodities bull market for years. It is our viewpoint that we are in the 4th or 5th inning and just taking a rest before the next leg up begins.
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Financials
Stocks: Stocks ended the week much better than they stated, clawing back to end modestly lower. The Dow finished the week 55 points or less than 1% lower at 8076 for its first loss in 7 weeks. The S&P traded on both sides of positive and negative but finished the week 3 points lower at 866. For the month of April the S&P is up nearly 9% and on track for its best 2 month run since 75’. The NASDAQ was able to keep its streak alive, ending higher for the seventh consecutive week adding 21 points to 1694. Earnings were largely ignored as were the stress tests, as the market disregarded these tests feeling the gov’t is once again letting banks off the hook. With the results still 1 week away don’t hold your breath for any earth shattering results. The dilemma is that the recent rally was led by financials and with banks on the guillotine we feel it’s unlikely the financials will remain the leaders. We remain cautiously optimistic but if forced to pick a direction we would say down. That is not to say an attempt at 900+ on the S&P is unlikely, we will just be spectators not speculators. Remember the adage “Sell in May and go away.”
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Bonds: June 30-yr bonds were lower by just over 1 basis point with the lowest trade since 3/18. Support is seen at 123’00 with resistance at 126’00. The trend remains down but we could see a bounce being prices have come off 7 basis points just in the last 3 ½ weeks. June 10-yr notes were lower by 21.5 ticks last week, like bonds was the lowest price since 3/18. Support comes in between 120’16-120’23 with resistance between 122’05-122’16. The trend remains down but the pace of selling may slow now with the rate back above 3.0%. We are advising clients to continue accumulating shorts in March 10’ Euro-dollar positions. We are approximately in the middle of the trading range we have been in for the last 3 months. The Fed meets this week and we expect no change in policy, at most some jawboning on how to keep longer term rates low.
Softs
July cocoa picked up $58 last week recovering from the previous 2 week’s losses of $383. Support is seen at 2400 with resistance at 2500 followed by 2532, the 20 day moving average. On further weakness in the dollar we may see a short covering bounce being prices are oversold.
July sugar closed up 54 ticks, the highest close in 7 months, helped by higher gasoline prices and what appears to be fund buying. Support comes in between 13.70 and 13.80 with resistance at 14.25 followed by 14.60. We have advised clients to lighten up on longs or at a minimum tighten up stops. Additionally, our clients sold July calls against some of our October call positions.
The US Census Bureau said that cotton mill use increased from an annual rate of 3.09 to 3.14 million bales in March. July cotton closed up 2.10 cents at its highest level since late January. Resistance comes in between 53.50/54 with first support at 51.00 followed by 50.00. We would be a cautious buyer on breaks. We have considered selling July calls against a purchase of October calls; contact us for pricing.
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_____________________________________________________________________________________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.
29/04/2009 at 6:34 am Permalink
Copper’s was on a brief upswing. The swine flu scare (and it is a scare) will knock some stuffing out of most commodities for a bit.
Say GM’s equity for debt proposal is shot down and they actually go into bankruptcy I’d expect metals to drop tank down the Hudson with concrete boots on.. Might be good for short sellers.
“…stay awake to the ways of the world, cause shit is deep ….”
-inspectah deck