Into the Futures-- May 9, 2016
Into the Futures – May 9, 2016
Can the Fed raise rates?
• Will equities be risk on for the remainder of spring and summer?
• What’s the impact of the Saudi oil minister’s dismissal?
• If equities are a buy is gold a sell?
• Will natural gas prices fall below $2?
The question investors will be asking over and over for the next two months and probably the rest of the year will be can the Fed ever raise rates? In Janet Yellens words shortly after the Fed held rates in check after their meeting in April “We are concerned that the economy seems to be slowing”-- little did traders know how prophetic that would be. The ADP number for jobs that was released on Wednesday should have given investors a warning or heads up that Friday’s number might disappoint. I had mentioned this on Thursday’s Futures Now and felt the reaction might be baked into the number. The initial reaction to the report was negative but the buyers came in because at the end of the day, the conditions that brought the S&P and the Mini to the 2100 level remain—mainly cheap money. Jobs created have shown a steep decline over the last 3 months with numbers trending down as we head into the summer. I had mentioned in last week’s letter how corporate profits are at low levels and the recovery which is in its 6th year is one of the shallowest on record. The number of economists that believe a June hike is on the table has fallen to 12% and another jobs number like the last will push that number lower. If the Fed does not raise in June I cannot see them raising rates this year as we would be too close to the election. I have not read Hillary Clinton’s stance on the issue but Donald Trump has indicated he would like to see rates low for a longer period of time. And the reality is that this recovery is too fragile for the US to raise rates. All other central banks are easing and tightening of the US dollar would put exporters in an even worse position. While I don’t believe the Fed will raise that does not mean it will be a negative for markets as we witnessed on Friday. If the Fed is going to prime the pump then investors will drink from the well. I am not predicting we soar to record heights, unless some good economic numbers are released but I do not see the market falling much. My bias is neutral to higher and I will enter into longs near areas of strong support.
Saudi Arabia fired their long time oil minister over the weekend and it is surely because the terrible policy that was set forth in trying to flood the market with oil and cause others not to be able to produce. It turns out US frackers and others around the world have been a lot more resilient in keeping production up. Some because of need such as Venezuela and Iran and others because they still can. While prices have been recently supported and have climbed nearly 50% from their lows, it’s still about $40 lower than where it needs to be for the Saudis to pay their bills. Meanwhile back in the US at $45 or $50 a barrel some frackers and their wells are again profitable. In fact there are over 1,000 wells that are near completion and ready to go. Even though I am laying out a fundamentally bearish case for oil prices it doesn’t necessarily mean they will be lower in the near term. The dollar should continue to be weak because of the Fed inaction. Demand for diesel; jet fuel and most importantly gasoline should be strong at least until Independence Day, and with the firing of the Saudi minister that will create uncertainty in the oil markets. Will the Saudi’s take a different approach? Will they look to make an agreement to cut production to boost prices? These are questions that will keep crude oil prices supported IMO. And finally don’t forget about the wild fires in Canada and what that will do to production there. The COT report shows that over the last 3 weeks hedge funds have reduced their longs and while they still vastly outnumber short positions held there seems to be some profit taking going on. My bias for crude oil is higher –I am long and while I was confident the trade would work based on a weaker dollar and product demand—I am more confident of it now with the geo angle being added.
Since the Fed implemented their stimulus plans gold has been a sell. Think about it; back in 2012 gold was trading $1800 and as the Fed gave the market more stimulus the price of the metal fell to $1050 or so by late last year and now as the Fed grapples with the decision to raise rates it’s on the rise again. The market is topsy-turvy as the Fed added more stimuli it was supposed to weaken the dollar create inflation and gold would be the safe haven. But what happened was central banks around the globe weakened their currencies and the dollar rose causing commodity prices to fall and quashing any hopes of inflation rising. The reason investors are buying gold now is because of the mixed messages coming from the Fed and the growing belief that no matter what they do growth will be sluggish. My opinion is its going to take a change of administrations and hopefully the next one will realize it’s the mounds of regulations that are holding the economy back. Its seems gold adds about $20 to $25 in its price every time the Fed misses a deadline to raise rates. And while it does not always hold those gains it has been creating new levels of support. Once the market traded above $1200 it became support—above $1225 and it never looked back, same with the $1250 level –now it seems $1270 is the new support. If investors are told by the Fed they won’t raise this year then gold prices after an initial gain could fall—why? Because a statement like that would create more clarity. Managed money has added to the number of gold contracts held and those now stand at levels not seen in years. My bias has been buying the dips and that has worked well. I will continue that until it fails.
Natural gas prices have not moved much over the last few weeks as the $2 area seems to be the new support. Last week supplies grew greater than expected and that is the 5th week in a row that has happened. Temperatures east of the Mississippi were colder than normal last week and temps west much higher. The weather pattern returns to normal this week and if supply injections miss because of the colder weather, then I would sell any rallies towards the 220 area. Natural gas is very well supplied and we are not near the peak of demand for the season which comes in around July or August. The weather the country is experiencing is the in-between time of seasons—but it won’t last forever. To be clearer my bias is to sell rallies for the next few weeks but as we reach the end of this contract and enter June the weather will start to affect prices and buying the dips will be how I approach the market. Managed money has added to shorts and that is bearish but I would not be surprised to see that trend start to reverse in the next couple of weeks.
These are the numbers to watch:
The e-mini has resistance starting from 2058 to 2063 above this there is resistance from 2069 to 2077 which includes the 21 day MA and above this resistance runs from 2084 to 2090. Support in the mini begins from 2042 to 2036 and includes the 50 day MA, under this there is support 2030 to 2024 and below this there is support from 2013 to 2006 and includes the 200 day MA. My bias is neutral to higher. My trade to buy in front of the jobs number had the right direction –just too tight of a stop. I will look at that area again if the market dips.
Crude oil has resistance starting from $4600 to $4640 above this there is resistance from $4680 to $4730 and above this there is resistance from $4820 to $4870. Support in crude oil begins from $4500 to $4450 below this there is support from $4370 to $4320 and under this the support runs from $4260 to $4210. My bias is higher, I am long my stop is now $4460 and my target is $47.
Gold has resistance starting from $1297 to $1308 above this there is resistance from $1317 to $1325 and above this there is resistance from $1337 to $1343. Support in gold begins from $1277 to $1270, below this there is support from $1261 to $1254 and includes the 21 day MA and below this there is support from $1249 to $1243 which includes the 200 day MA. My bias is neutral to higher but I would not be surprised if the market traded to the low $1270s—if it does I will look to buy.
Natural gas has resistance starting from 215 to 220 above this there is resistance from 224 to 229 and includes the 200 day MA and above this there is resistance from 238 to 243. Support in natural gas begins from 204 to 199 and includes the 21 day MA, below this there is support from 193 to 187 which includes the 50 day MA. And below this support runs from 179 to 174. My bias is neutral to lower and I would like to sell from 215 to 220 and use the 200 day as the stop.
Government reports scheduled for release this week will include:
May 10 10:00 AM JOLTS - Job Openings
May 10 10:00 AM Wholesale Inventories
May 11 7:00 AM MBA Mortgage Index
May 11 10:30 AM Crude Inventories
May 11 2:00 PM Treasury Budget
May 12 8:30 AM Initial Claims
May 12 8:30 AM Continuing Claims
May 12 8:30 AM Import Prices ex-oil
May 12 8:30 AM Export Prices ex-ag.
May 12 10:30 AM Natural Gas Inventories
May 13 8:30 AM PPI
May 13 8:30 AM Core PPI
May 13 8:30 AM Retail Sales
May 13 8:30 AM Retail Sales ex-auto
May 13 10:00 AM Business Inventories
May 13 10:00 AM Mich Sentiment
Before deciding to participate in the commodity futures market, you should carefully consider your investment objectives, level of experience and risk appetite. Most importantly, do not invest money you cannot afford to lose. There is substantial risk trading commodities.
Past performance is not necessarily indicative of future results. There are no guarantees of profit nor of avoiding losses when trading commodity futures contracts. No representation is being made that any trade will or is likely to achieve profits similar to those in the past. No part of this letter may be reproduced without the consent of Anthony Grisanti