Commodities Review For The Week Ending September 21

Energies

Crude oil support above 88 held and pushed momentum to the bulls as energies appear oversold. Moreover, the dollar rally is likely limited in the intermediate term. The energy sector remains susceptible to hurricanes and supply issues and I expect to see some choppy action ultimately push the sector about 10% higher before ultimately failing once again. Natural gas remains a relative value play ahead of winter demand.

Financials

The big government bailout is likely to see follow through this week as Congress puts forth the nearly $1 trillion anti-capitalism ‘make the pain go away’ program. The stock market should see continued volatility and price expansion with a bullish view. Bonds have likely topped with the Fed’s don’t bend so we’ll break policy newly instituted at Tuesday’s meeting. Sell the bounces. The dollar is stuck in what should amount to a congestion pattern between now and year’s end. This sets up short strangle premium collection opportunities throughout much of the currency sector, focusing on wide first or even second standard deviation strategies with 3 month time frames. The yen is on the way down and is worthy of inexpensive short term put plays.

Grains

A choppy and volatile grain sector has been hypersensitive to commodity fund shifts but is approaching a period of congestion in the dollar and oil that sets up a non-correlated rally due to harvest time issues. The rate of maturity in corn and beans is nothing short of scary and could become a major issue in coming weeks. At this point the limited amount of corn in and past the dent stage suggests vulnerability to frost despite the late planting offering a more rapid ascent to crop maturity. This means if a cold weather front hits in the next 3 weeks a catastrophic crop failure is possible. Bull call spreads in corn for December are recommended. Do not buy into the rice rally as this market has seen its highs and is likely to fail in coming months, making inexpensive puts a solid play in this thin market.

**Chart courtesy of Gecko Software’s TracknTrade

Meats

I continue to see a bullish turn in cattle and hogs at these levels, which will probably be supported by rising grain prices in coming weeks. This is counter to my long term views, especially in cattle, but allows for a short to intermediate term rally in meats to fill a rounding top and an ultimate market failure to begin in late November or early December.

Metals

I suppose when I said the gold and silver markets were value buys last week I did not foresee the massive spike in prices that ensued during this week of commodity chaos. Exchange increases in overnight margins for metals are likely to end this rally before it can really get some legs under it, however the volatility is far beyond anything that offers legitimate opportunity. The option prices are through the roof on both the put and call sides and offers premium collection opportunities through naked selling and ratio credit spreads for those with deep pockets to handle the volatility.

Softs

Cocoa caught a strong bid on the commodity rally mid-week but overall has little ‘oomph’ left to it and should see some strong selling this week to confirm the bearish bias that I have maintained. Buy puts on this recent pop. Coffee is getting beat up as supply is strong and global demand is perceived to be diminishing. This remains a long term buy with bull call spreads, and a short term buy via futures with put protection. Cotton has taken a substantial hit on the chin as grain prices have congested, but continues to be a big blinking light on my radar screen for a long term buy at these value levels. OJ is in a severe downtrend as weather issues have skirted Florida and inventory levels are at historic highs. I remain contrarian here and recommend buying the dips. Sugar is avoidable until it tests support levels, otherwise I am a call seller on volatile up days.

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