I received an email from Jon Nones, Financial Writer for Resource Investor, asking for comments on the commodities markets. Jon wanted my thoughts on which markets I thought were leaders and laggards in the first leg of this secular bull market in the commodities markets and which might lead the markets higher from here. The following are excerpts from my response to Jon which was sent on July 22, 2006. Take note of my comments on Natural Gas which has skyrocketed since I wrote these comments.
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The Energy complex: LEADER. You certainly have to rank this group as a leader in the current bull market in commodities. But what some have missed is the fact that NaturalGas, after record highs in 2005, has now fallen 50%. Did Nat Gas make a bottom recently and is now ready to retest the highs of 2005? It's too early to tell from a strictly technical view but I wouldn't be surprised if a major bottom is in place in this market. So I might be tempted to BUY NAT GAS and SELL CRUDE or UNLEADED GAS at this juncture because the fundamentals simply don't support Crude at these levels and I think that market could see the same kind of retracement that Nat Gas experienced.
The Precious metals: LEADER. These markets are a tough call right now. I had no choice but to declare the Bull market over recently when Gold closed below its 100-day MA on 6/13. Of course we now know that Gold bottomed the following day and was able to regain nearly 68% of the decline before turning lower again recently. When Gold failed to break the previous low at 546.00 I got far less bearish on the market. That was a significant level on the chart and the market held. Now, the market is once again sitting right above the 100-day MA (619.90). I'd be willing to wager that, if the market closes below this level a second time that we'll see the market move below 546.40, the recent low in June. Silver is in the same boat. Copper is approaching trendline support. If it breaks, sayonara to Copper in the near-term.
Grains: LAGGARD. Here's an area that is very interesting to me. I love to trade the grains because I've probably been trading them longer than any other group. I think this could be a group to watch because Corn has traded sideways all year long. It's not going to do that forever. Ditto for the bean market. Wheat may have made a major low in March and could be the market to lead the entire complex higher from here.
Meats: BIPOLAR. You never know what you're going to get trading these markets. That's why I don't trade them.
Softs: MIXED BAG. There have been some great moves in these markets and there have been some duds. FCOJ and Sugar have been stellar performers until this year. Are they consolidating or are they ready to tumble? I think it's too early to tell. Cotton could be a surprise over the next 12 months. With the recent break below 50 cents, this market looks like it could roar into 2007. Cocoa is interesting. If it hold the previous lows at around 1400 it could reverse quickly and move back to the upper end on the trading range near 1900. But I think this market could break the previous lows and this would start the beginning of an ugly slide back below 1000. Coffee is near 2 1/2 year lows. The same holds true for Coffee as it does for Cocoa. If the market breaks 90 cents it could go to 50. Lumber has been puking its guts out and that's a very good sign that there's big trouble in the housing sector.
Which leads me to my "financial apocalypse" scenario that I've been touting for as long as I can remember. 75% of the economy is based on housing. Housing is going to be bloodied over the next few years and it's going to take the US Economy with it. Just look at Lumber if you don't believe me. When this house of cards really starts to fall it's going to be ugly. Ben Bernanke wanted to be the Chairman of the FED. It could be the biggest mistake of his life.
Dale F. Doelling
Chief Market Technician
Trends In Commodities
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