by Scott Hoffman, Senior Broker & CTA
The commodity liquidation gained steam this week. The energy markets faced slack demand and inaction on the part of OPEC to reduce production. The selloff in energy had a big ripple effect on both commodities and the financial markets, as it led to a broader liquidation in many commodity sectors, and the financial markets were cheered by the receding inflation signs. The ISM manufacturing survey showed a weakening US manufacturing sector. Today’s ISM services number showed a healthy US service sector, with a big drop in prices paid showing the moderation in inflation. Friday will see the release of the payroll picture for September. New jobs are expected to show an increase of 120k, which would continue the trend of moderate employment growth.
Going forward, I think the financial markets focus will be on US economic growth, notably the housing sector. As we move later into the month, expect to see the markets react to prospects for mid-term Congressional elections. Indications that the Republicans will lose control of Congress could pressure equities. In addition, traders will start to pay attention to the prospects for holiday spending, which accounts for a large portion of consumer spending.
S&Ps have been a sideways affair for the past week. There’s stiff resistance around 1350, but the ability to hold the breakout area at 1340 has kept a floor in. Look for a breakout of this range to determine the market’s next move. I’m generally bullish on stocks, as the decline in commodity prices and interest rates should continue to buoy corporate earnings.
The Dow has been the strongest stock index, as more conservative stock investors have been attracted to big cap stocks. With the Dow making new all time highs, upside targets are kind of meaningless; support is at 11700.
Today’s big drop in the prices paid component of the ISM non-manufacturing survey and the narrow range/doji setup from Tuesday pushed Treasuries higher. Resistance on Dec Bonds is at the September high of 11310. Caution will be in order ahead of Friday’s employment report. I think the pause in rate hikes did its job in reviving the economy, but the pickup in the economy could have inflationary implications.
It is an interesting sign that the Dollar hasn’t garnered any strength from the rise in US equities. I guess it proves what my Economics professors taught – interest rate trends drive foreign exchange rates. That being said, I think the Dollar will find strength going forward as the US economy picks up.
The Yen is trading near its 2006 low as the BOJ continues to hold off on raising interest rates. The current pattern in MACD indicates lower prices to come; I’d look force opportunities to short.
The “Loonie” is being pressured by the decline in commodity prices. Traders looking to play a continued decline in commodities could look for opportunities to sell the Canadian as there has been a positive correlation between the Canadian Dollar and commodity prices.
Gold took it on the chin Tuesday. The selling was attributed to Middle East Central Bank selling. I think we’re seeing a broader based commodity price decline as the commodity sector has lost its luster (pun intended!) as an investment theme and the markets return to a more normal supply and demand relationship. Gold has broken under the September low around $575; continued trade under there could lead to a bounce, which I would look to sell.
Silver is following gold lower, although it has held above the September low at 1055. The extremely low level of momentum (bottom panel of the chart) indicates that this low may hold for the first time down, but I’m still bearish intermediate term.
The copper market has been hit by both the broader commodity selloff and the decline in the US housing market. Today copper is breaking under its September low of 325.50; I’ll be keeping an eye on Copper for a buying opportunity, as a rebound in the US housing market could reinvigorate demand for copper.
Sugar prices have seen a huge decline in conjunction with the big decline in energy prices. The “ethanol bubble” of late shows signs of deflating as the markets show the wisdom of the old saying: “The best cure for high prices is high prices”. I’ve sold sugar twice, first on September 20th on a doji/range range breakout setup which snowballed into a big decline, then again on Tuesday as it broke under the trendline on the chart. The next downside price objective is the 2005 low at 1040.
Energy prices continue their big washout as the US hurricane season has passed, demand has moderated, and OPEC hasn’t made any moves to cut production. The move below $60 in crude oil is keeping the pressure on; the next downside objective is $55. As with sugar, the energy price bubble is still unwinding, and I wouldn’t rule out a move to $50 before stabilizing. The Middle East situation remains the real wild card for energy prices; a Democratic victory in US congressional elections could be bullish for energy prices as it would “muddy the waters” as to US Middle East policy. Heightened Middle East turmoil would put a supply disruption premium back into the market.
Beans have been a range bound affair lately as the US harvest gets rolling and traders start to watch South American weather. Continued trade under $5.50 in November Beans should keep the pressure on as the harvest pressure builds. A drop under $5.38 should press the downside, with $5.20 the next downside target.
Wheat continues to see decent demand, and dryness in Argentina has raised concerns over the South American crop. I’m looking to sell a break of the recent up trendline as weakness in Corn and Soybeans should push Wheat lower.
The impending harvest and the end of “ethanol mania” should pressure Corn as the harvest comes in; support is at $2.60 then $2.50 basis December. Longer term ethanol has increased the demand base for corn, meaning the harvest low should be a good buy, but it’s going to take more correction in time and price to bring this about.
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