A Market Review and Opinion Report For March 11, 2012

Energies
Crude oil remains resilient after a clear topping formation developed a week and a half ago. Iran’s willingness to engage in nuclear talks is more likely an effort to play the game than a genuine effort to end the embargo. Let’s not forget just because no one buys the oil doesn’t mean it goes bad. Overall crude oil is susceptible to a strong dollar after the bullishness of the jobs reports wears off. China’s declining rate of growth and combined with declining demand in Europe should end the bull move in oil and start it on a downward spiral that began on the 27th of February. Speaking of downward spirals, Natural gas is a strong buy with straight deep out of the money calls (Dec.) to play a volatility pop to the upside.

Financials
Stocks held near the highs after a very bullish jobs report, for the 3rd month in a row, brought some short covering. Overall the reaction should have been substantially more bullish and this implies an overbought market condition at a topping point. When good news can’t rally a market and bad news ruins it then the bulls should run for the exits. Bonds broke down on the report on Friday but overall is a strong buy with straight calls as this market has one more major panic surge left in it. I am a firm believer that there is an economic panic coming in a matter of weeks that should rattle the S&P to sub-1270 prices and run bonds up through 148. The dollar is a strong buy, seemingly bullish under almost any fundamental scenario – strong jobs in the U.S. means we are leading the world out of economic recession (fat chance but unfortunately that is the perception) and a weak stock market inversely correlates to a bullish dollar. Any way you slice it I think the dollar is on the precipice of a monumental rally to 90+ on the index. The euro and pound remain sells while the Aussie and New Zealand dollar could experience massive selling this week. The Japanese yen set an ugly formation on a daily chart and broke key near term support, setting up some additional long liquidation and possibly a bigger break than expected in this market. Sometimes you have to look past what appears to be an obvious technical pattern and see what the next turn is likely to bring in a market, and in the case of the yen I believe it is a sharp reversal. I remain long term bullish and recommend buying straight calls on this retracement. I continue to stand by my forecast that:

The Japanese Yen futures will hit 140 before it hits 80 or I will quit writing the Weekend Commodities Review...forever.

Grains
Soybeans continue to segregate from the rest of the grains complex, however Friday’s technical failure on a breakout volatility rally could spell the end of this move. Use a cent above Friday’s high as a stop and jump short this market. Corn remains a spread sell against wheat, however both markets appear bearish.

Meats
Cattle has clearly broken the bull trend and is a strong sell. The daily chart looks nasty with a weak congestion forming the last few days. Expect the lows to be penetrated by Tuesday. Hogs offered a strong argument for a sell this past week, however it is still stuck in the middle of a longer term congestion pattern which makes this market avoidable.

Metals
After offering some downside volatility both gold and silver have congested, albeit in a weakened state. I acknowledge and accept that my timing in gold and silver has, for the most part over the years, been impressively off. However if today was the first day I ever wrote a word about metals I would be screaming from the rooftop to short these markets! The technicals are clearly bearish, the flight to quality is no longer there and a strong dollar means declining global demand.

On a side note I have been bothered lately by what may be an obvious thought to some. Commodities in general fall under two categories – renewable or non-renewable. You can breed more cattle, plant more corn, grow more coffee, etc. Oil, gold, silver and copper, on the other hand, have a limited life because once the supply is gone its gone. However the main difference between gold and oil is that oil usage evaporates the original product while gold is stored by the nature of its usage. In fact during this gold and silver boom the growth of stores dedicated to the collection, melting and redistribution of the metal has skyrocketed. Coin sales are through the roof. The point is the supply, for the most part, doesn’t go anywhere that it can’t eventually reenter the supply chain. Perhaps even more concerning is that the advent of mechanisms like Spyder gold shares and ETFs have made the hoarding of physical gold an industry onto itself. This would appear to be a long term effort to collude and squeeze the gold and silver supply, however the collusion is occurring unbeknownst to a number of participants which leads one to liquidate unknowingly and make the final move of the squeeze all but impossible.

Investors are all familiar with the concept of a bubble, but market bubbles like real estate and internet stocks take different forms under different circumstances. It is important to recognize that gold and silver are in a bubble and I believe these bubbles have already peaked and are set to burst on the way down. What happens if a mass liquidation of the $70 billion in physical gold GLD is supposedly holding (according to an upcoming CNBC report) occurs? One of the most important events that should lead to a top of the gold market is Dodd Frank legislation that went into law in 2010 and began impacting the industry more aggressively last year. The legislation put physical metals houses in the cross-hairs of a government crackdown on the boiler room-style efforts to trade up metals and is the sign of the times changing in what has been the equivalent of the new millennium’s gold rush. When the government starts to make it harder and harder to make money in an industry it means that greed has gotten the better of the market and the top is likely here.

Softs
Coffee continues to fall as anticipated with more downside expected. There is little support in this area and a move to 160 should occur. Cocoa’s spike is an indication of congestion ahead. Cotton resumed its downtrend and is a sell with puts if you must trade this market. OJ is congesting at the end of a pennant – what I like to call a Mound Double SqueezeTM – an important indicator of a market reversal. Get short with straight puts and look for volatility expansion to the downside. Sugar made a nice rally attempt only to v-shape reverse and should see more downside ahead if it can break the trendline support on a daily chart.



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