Into the Futures May 23, 2016
Surprises were in abundance last week.
• Will the Fed raise rates in June or is this a case of too much being read into the minutes of the last meeting?
• If rates do rise can crude break $50?
• Will gold hold $1200?
• How close are we to demand season for natural gas?
What came out of the Fed meeting surprised quite a few investors as most felt- including yours truly- Janet Yellen and company would have taken a dovish tone in determining when to raise interest rates. What did they say that was so different from past meetings? They reiterated that its data dependent, that they want to stick to the timetable of 2 hikes this year and that while June, is on the table it’s not a foregone conclusion rates will go higher. This is not much different than what they have said all along and if recent data is taken into account of which it most certainly will, the time seems to be right for a hike. All the parameters the Fed set 6 years ago on which to base a hike have in one way or another been met except for the pesky inflation data. That is up until last month when the CPI index showed a surprising bump of .4% which puts the annual inflation rate over the 2% target that was set long ago. On top of this the GDP will be revised up to 1.7% growth for the first quarter of 2016 which is much better than anyone would have expected. Incomes have risen and unemployment stands at 5%. Yes, each one of these numbers can be dissected and the negatives found but these are the baselines the Fed follows and what they use to make decisions. They have removed some of the language about foreign economies and their strength being a factor and it seems like they are paving a path to a hike in June. If rates rise I believe the immediate reaction will be negative for equity prices as dollar strength will put exporters at a distinct disadvantage. There is weakness in equities in anticipation of that as the potential hike is only 3 ½ weeks away. My bias for equities has changed I believe from now until the hike the market will be in a sell the rallies mode rather than buy dips. There will be money taken off the table as investors await the decision and that will put downward pressure on prices. This week traders could see the Mini break below key support levels.
Crude oil prices felt the immediate shock of a stronger dollar but rebounded nicely as traders weighed fundamental data against the dollar move. The facts are US production is about 900,000 barrels off its peak—Nigerian production has fallen by 40% and while there are no clear numbers from Venezuela most experts agree production has fallen due to political unrest. When you start adding up the numbers it comes to over 2 mbd and when weighed against the increases in Iran, Iraq and Saudi Arabia it’s still a huge net loss. I have said all along its going to take a production reduction to boost prices and the market is finally experiencing that. Dollar strength will work to prevent prices from rocketing but seasonal demand and falling production will prevent them from falling hard. I anticipate a range in prices over the summer and fall months of $45 to $52 per barrel and while my bias was buy the dips—I now believe there are profits to be made trading both sides of the market. I am not as concerned about production ramping up rapidly in the US as prices rise because I believe frackers will be much more cautious about the wells they put online –plus crude oil prices would have to stay above $50 for a sustained period. There are hundreds of wells ready to go but there is not the money being thrown at them as before and higher interest rates will only make that situation worse. Higher rates mean higher borrowing costs which will have to be factored in. If equities prices slide in a meaningful way crude oil prices will follow.
Gold could be the biggest loser in a higher rate environment as a glimpse of that was seen on Thursday and Friday as prices lost almost 4% of their value. What brought prices to this spot however was Fed uncertainty and that still remains as they left open the window of maybe there will be a rate hike or maybe not. See the difference? Before Wednesday most thought there would be no hike ---the “maybe” adds the uncertainty. Some sports teams only allow the head coach to speak to the media not the assistants. Maybe the Fed should look to adopt the same policy-- only Yellen speaks –no one else, although if you have been long gold the multiple voice thing has worked in your favor. I am long now and until the hike actually happens I will not abandon the buy the dip policy, too many times we have been down this road only for the Fed to disappoint –traders on the floor say every time the Fed misses a chance to raise add $20 to the price of gold –if they miss this time add $50—if it really happened subtract $50. But until it really happens I will remain long.
All of a sudden summer is sneaking up on us as temperatures in the Northeast will reach the low 80s by mid week and earlier in the Midwest. The miss in the supply number could be an ominous sign if it means demand is starting early. Natural gas is used more and more and will overtake coal this year as the number one source in powering electric plants in the US. This is a huge development as coal has held that title for the last 100+ years. Supplies of Nat gas continue to run higher than last year but if summer starts in June those could dwindle fast. NOAA put out its 3 month weather forecast last week and it calls for above normal temperatures for the vast majority of the country through the Labor Day weekend. For these reasons I will now look at natural gas from the buy the dip side rather than sell rallies. There is large support at 200 and below, if contracts are purchased near those levels they would be profitable IMO. The latest COT report shows hedge funds have added longs and reduced shorts—they might be changing their opinion on prices and that means more buying to add to longs and more buying to cover shorts. My bias is neutral to higher.
These are the numbers to watch:
The e-mini has resistance starting from 2054 to 2062 and includes both the 21 and 50 day moving averages above this there is resistance from 2076 to 2082 and above this the resistance runs from 2091 to 2097. Support in the e-mini begins from 2036 to 2030 below this there is support from 2024 to 2018 and below this there is support from 2008 to 2002 and includes the 200 day MA. My bias is neutral to lower as I believe there will be a liquidation of positions in anticipation of a Fed rate hike.
Crude oil has resistance starting from $4870 to $4930 above this there is resistance from $4990 to $5020 and above this there is resistance from $5080 to $5120. Support in crude oil begins from $4750 to $4710, below this support runs from $4680 to $4630 and under this there is support from $4560 to $4510. My bias is neutral and I will look to areas of strong support and resistance to enter into trades.
Gold has resistance starting from $1261 to $1268 which includes the 21 Day MA above this there is resistance from $1283 to $1290 and above this the resistance runs from $1298 to $1306. Support in gold begins from $1251 to $1244 and includes the 50 day MA below this there is support from $1237 to $1232 and under this the support runs from $1226 to $1221. My bias is higher I am long and the stop is in place.
Natural gas has resistance starting from 216 to 222 and includes the 200 day MA above this there is resistance from 228 to 234 and above this there is resistance from 244 to 251. Support in natural gas begins from 209 to 204 and includes the 21 day MA below this there is support from 200 to 195 which includes the 50 day MA and under this support runs from 191 to 186. My bias is neutral to higher—the market has gapped open above the 21 day MA the top of the gap is 2074 and the 21 day is 2084—I will attempt to get long if the market attempts to fill the gap.
Government reports scheduled for release this week will include:
May 24 10:00 AM New Home Sales
May 25 7:00 AM MBA Mortgage Index
May 25 8:30 AM International Trade in Goods - Adv.
May 25 9:00 AM FHFA Housing Price Index
May 25 10:30 AM Crude Inventories
May 26 8:30 AM Initial Claims
May 26 8:30 AM Continuing Claims
May 26 8:30 AM Durable Orders
May 26 8:30 AM Durable Orders, ex-transportation
May 26 10:00 AM Pending Home Sales
May 26 10:30 AM Natural Gas Inventories
May 27 8:30 AM GDP - Second Estimate
May 27 8:30 AM GDP Deflator - Second Estimate
May 27 8:30 AM GDP Deflator - Second Estimate
May 27 10:00 AM Michigan Sentiment - Final
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