Life has been good if you have been long just about any commodity for the last year or so, but you know things are getting out of control when oil magnates in the Middle East are paying as much as $1 MIL for customized license plates. That being said, a variety of commodities are looking heavy and with the G-8 warning that we are “entering the danger zone” and with potential for a dead cat bounce on the dollar, we would recommend tightening up stops on your longs and step aside looking for commodities to back off short term. This will set up a nice long entry for several commodities from corn to cotton. Continue to monitor oil and the dollar as most commodities are keying of their direction.

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Stocks: The gradual slide south continues, but the selling hasn’t been climatic, which tells us that before you see a capitulation, the path of least resistance is down. If you have never heard of the “Hindenburg Omen” you may want to Google it because it indicates there is a 25% probability of a full blown stock market crash that will happen in the next 120 days. Wake up, last month was the worst June in 78 years and the first 2 quarters showed the worst performance in stocks since 1970. The Dow ended last week down 58 points or 0.5% to 11289. The S&P fell for a fifth straight week and gave up 15 points or 1.2% to 1263. The NASDAQ lost 70 points or 3.0% to 2245. We are officially in a bear market and although we could get a short covering bounce, we are not confident enough to call a bottom. Lighten up, hedge, diversify, shift into non-correlated assets…do something!

Bonds: The U.S. Labor Department said that the unemployment rate remained at 5.5% in June. Non-farm payrolls were down 62,000, roughly as expected. Non-farm payrolls in May were revised from a decline of 49,000 to a decline of 62,000. Treasuries were range bound last week and although we have a bullish bias being that stocks may rally irrationally, you could see some liquidation of debt that would take prices lower. We remain on the sidelines looking for a better entry for now. September 30-yr bonds find resistance at last week’s high of 116’16 and support at 115’00 followed by 114’22. September 10-yr notes should have trouble getting above 115’04 and on a pullback should be supported at 113’25.

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Commodities: December Cotton prices have dropped over 600 points from the close on Friday 6/27. The market has been pressured since the release of the USDA's acreage report as it showed that 9.246 million acres was planted. This was down from the March report estimated plantings at 9.39 million acres, but the report was viewed as bearish because traders were expecting plantings to come in around 8.90 million acres. Although prices may come off short term, if one reads into this number it appears we will be planting 15% less cotton than last year. We are already positioned long for clients with 10 cent call spreads in December and will be using the current pullback to get clients whom were not previously positioned long via the same call spreads or long the futures as soon as we see signs of a reversal. We maintain that prices in December should make their way to 90 cents in the coming months.

September cocoa was down $39 on the week but that does not tell the whole story as we were down $130 on Thursday alone as we may have a potential triple top forming on the daily charts. As we voiced the last 2 weeks we are at extremely over bought levels, a price retraction is overdue. A stronger dollar would equate to a price reduction in cocoa. For now, the 20 day moving average at 3088 supports prices but we could get a move back to 2800/2900 with no chart damage. Eventually we will be advising to get long again but for now stand aside.
Like cocoa coffee has been on a tear, but prices late in the week exhibited a similar topping pattern. September coffee fell 3.80 cents on Thursday and we closed almost 4.50 cents from the highs. Being there is no threatening weather in the forecast for Brazil, and the long awaited harvest is said to be making progress, we could see prices in the short term make their way back to 144; that was the breakout level which initially served as resistance and now should serve as support.

September orange juice ended up 15.70 cents at $1.2970 with talk of Tropical Storm Bertha off the coast of Africa. It is far too early to tell if Bertha will be any threat to Florida, but it wakes traders up to the presence of a new hurricane season. We got fortunate with clients as we recently established longs for customers (see recent commentaries) and this move allowed us to take profits a lot quicker than we had anticipated. Last week fcoj advanced almost 14% and may have gotten ahead of itself, we will use a setback to get clients repositioned long once again in futures and options.

Sugar has been sweet to us lately as you have seen prices advance 27% in just about one month of trading. We are now trading at the highest price we have seen in 3 ½ months and have advised clients to tighten up stops and to start moving their October 08’ positions out until March or May of 09’. We sound like a broken record, but we will stay long sugar for the next few years looking for much higher prices to come. We feel the recent move was just a taste of what the next 18-24 months has to offer those who stay long sugar #11. For now prices seem to be overbought and we would not rule out a setback, so if you are positioned long with options lighten up and if you have heavy exposure with futures sell some calls or buy some puts to protect your position.

For now lumber is like watching paint dry, however it appears to be a relatively low risk trade if you have the patience. Traders could get long futures in September or November with stops just below the recent lows looking for prices to move north in the coming weeks to months. What makes this attractive is the risk/reward ratio. We are back above the 50 day moving average for November as of last week and just #4 off in September. A word of caution as volume, and open interest are lacking so expect slippage, not so great fills and it is possible to see a gap down below stops, but not likely.

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.

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Matthew Bradbard

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