Into the Futures, May 30, 2016
Into the Futures – May 30, 2016
The data is right for a hike.
• Will the equities market reach a peak if interest rates rise?
• What will a rate hike mean for the price of oil?
• Is gold poised to fall below $1200?
• What will the extreme temperatures mean for natural gas supplies?
No I don’t believe equities can continue their rally with the prospect of higher rates on the horizon. There, I said it. Simple mathematics shows that it won’t work—when faced with 2 similar items of different prices the consumer will usually go for the cheaper one—it’s ingrained in us to look for a bargain and going forward the more expensive item will be made in the US. Recent economic data has been mostly positive and the rhetoric leads me to believe the Fed will raise rates when they meet June 14-15. Janet Yellen in a speech last week made it clear that a hike could come at any Fed meeting from now till the end of the year. Investors never feared the first hike because interest rates continued to be so low that money flowed—suddenly it’s starting to get serious and questions will be asked—will consumers be able to afford that new car because of higher rates? Can they buy that house? Will they be able to pay off the credit card debt accumulated? What I remember from the last hike was that the interest rate on my credit cards went up almost immediately yet the interest rate paid on my savings stayed the same. Can the Federal government absorb paying higher rates on its debt? We are about to find out. If you remember the dollar was near the 100 handle in the dollar index and fell when the Fed last raised rates. Many including me are expecting the dollar to fall but we all could be missing one important thing-- the dollar was near the 100 handle –today it stands in the mid 95 handle. There is a lot of room to the upside. The Mini has breached the 2100 area and is poised to make new highs. I cannot buy into this rally and I think investors should prepare themselves for a selloff. It will be difficult for US firms to compete and earnings which have failed to excite should continue to suffer. There is a huge amount of government data being released this week along with the jobs number on Friday and all of it should be watched carefully. My bias is neutral to lower.
Crude oil prices have been boosted by demand for products and production outages in Canada, Nigeria, Venezuela and the US. I watched with amusement the other day as analysts started to add up the numbers that I have been preaching about over the last few weeks and when all production losses are accounted for it’s over 2 million barrels per day. This is quite a significant number and is close to the imbalance that has plagued the oil market over the last few years. Demand for gasoline continues at its record pace along with diesel and jet fuel. Prices usually peak by the July 4 holiday as the heavy lifting of refining the products happens in April and May. There was a report late Friday of a refiner outage in Pennsylvania and hurricane season begins this week which are 2 uncertainties that can boost prices through the summer but if things remain as they are now prices should peak by July 4th. I have stated that I believe crude oil will reach the $55 area by that time and I still feel the market has everything in place for that to happen. Recent dollar strength has not stopped crude’s march higher and while I expect a negative effect on prices if the Fed raises in two weeks I believe it will be seen as an opportunity to buy. Hurricane season could be active as the El Nino pattern that has not been favorable for them forming dissipates and EL Nina takes effect which is. The latest COT report shows that managed money has reduced some of their longs but still hold an overwhelming bias to the upside. No I don’t think crude will take a straight shot higher unless we have some unexpected event but all major moving averages have been held and the market has taken an embrace the bullish disregard the bearish attitude—However I would not be surprised to see the market start of the week poorly with prices lower in the early trading sessions. My bias continues to be higher and I would like to buy dips which can come early in the week.
Gold prices have suffered recently because of dollar strength and the prospect of higher rates –but this could be the perfect set up of sell the rumor, buy the fact. The rumor is rates are rising and that will be bad for gold prices ---that’s the sell part. The fact part –well, all I have to do is look to the last time the Fed raised rates and how the dollar fell and gold rallied. Yes –I pointed out above the dollar started at a loftier level but gold prices have already made their move, in other words a dollar rally could be baked in –another thing to remember is that gold prices rallied when the last hike wreaked havoc on equity prices-- the same thing could happen again. And what if the Fed decides now is not the time for a hike? In that scenario the dollar will sell off and gold prices will rally-- huge –not just on that but the fact that the Fed missed another opportunity. The latest COT report shows that managed money has significantly reduced their longs but they still hold 205,000 to 48,000 edge –you will notice that shorts are up too. The gold market is above 2 significant areas of support and should hold the $1200 level this week. My bias is higher but I will keep tight stops on long positions.
The Northeast experienced a mostly sweltering Memorial Day weekend with temperatures in NYC reaching 90 degrees on Friday, Saturday and Sunday. This will result in a supply decrease when the numbers are released on Thursday and the once oversupply the market experienced in the beginning of the season has now dwindled down to about 10% versus last year. There has been a few weeks of misses in the injection numbers and if the current weather pattern continues that will accelerate. Production in crude which has been dropping has affected Nat gas production and in the Marcellus shale which is the largest production area in the US, production has dropped because of low prices. We are now entering peak demand season which will last for the next 3 months and all indications are it will be a hot summer. Hurricane season will not be as impactful to natural gas as crude oil as production is spread throughout the country but a large storm in the gulf could boost prices. On the bearish side the export market has not been as favorable to producers for a variety of reasons and the latest COT report shows the managed money has increased the number of shorts held and reduced longs. My bias is higher but I will wait to buy on dips.
These are the numbers to watch:
The e-mini has resistance starting from 2105 to 2112 above this there is resistance from 2119 to 2125 and above this the resistance level runs from 2133 to 2139 which includes the all-time high. Support in the e-mini begins from 2088 to 2082 under this there is support from 2077 to 2072 and below this the support runs from 2064 to 2058 and includes both the 21 and 50 day MA’s. My bias is neutral to lower we are now reaching an area where the mini has failed to breach numerous times I will look to short around the 2100 area with a tight stop.
Crude oil has resistance starting from $4980 to $5030 above this there is resistance from $5100 to $5150 and above this resistance runs from $5310 to $5360. Support in crude oil begins from $4880 to $4830 under this there is support from $4710 to $4660 and includes the 21 day MA and below this support runs from $4590 to $4540. My bias is neutral to higher I will however wait for a dip to buy.
Gold has resistance starting from $1221 to $1227 above this there is resistance from $1241 to $1249 which includes the 50 day MA and above this the resistance runs from $1258 to $1265 and includes the 21 day MA. Support in gold begins from $1202 to $1196 below this there is support from $1185 to $1178 and under this support runs from $1166 to $1160 and includes the 200 day MA. My bias is neutral to higher. There are 2 major areas of support --$1200 which the market is just above and the 200 day. If I buy near either I will keep a tight stop.
Natural gas has resistance starting from 217 to 221 and includes the 200 day MA above this there is resistance from 228 to 234 and above this the resistance runs from 247 to 253. Support in natural gas begins from 209 to 204 and includes the 21 day MA below this there is support from 201 to 196 and includes the 50 day MA and below this support runs from 189 to 184. My bias is neutral to higher and I believe the market will make a move to the 200 day and if it trades above will represent a breakout. I would like to be long on dips.
Government reports scheduled for release this week will include:
May 31 8:30 AM Personal Income
May 31 8:30 AM Personal Spending
May 31 8:30 AM PCE Prices
May 31 8:30 AM PCE Prices - Core
May 31 9:00 AM Case-Shiller 20-city Index
May 31 9:45 AM Chicago PMI
May 31 10:00 AM Consumer Confidence
Jun 1 7:00 AM MBA Mortgage Index
Jun 1 8:15 AM ADP Employment Change
Jun 1 10:00 AM Construction Spending
Jun 1 10:00 AM ISM Index
Jun 1 10:00 AM Construction Spending
Jun 1 10:30 AM Crude Inventories
Jun 1 2:00 PM Auto Sales
Jun 1 2:00 PM Truck Sales
Jun 1 2:00 PM Fed's Beige Book
Jun 2 7:30 AM Challenger Job Cuts
Jun 2 8:15 AM ADP Employment Change
Jun 2 8:30 AM Initial Claims
Jun 2 8:30 AM Continuing Claims
Jun 2 10:30 AM Natural Gas Inventories
Jun 2 11:00 AM Crude Inventories
Jun 3 8:30 AM Nonfarm Payrolls
Jun 3 8:30 AM Nonfarm Private Payrolls
Jun 3 8:30 AM Unemployment Rate
Jun 3 8:30 AM Hourly Earnings
Jun 3 8:30 AM Average Workweek
Jun 3 8:30 AM Trade Balance
Jun 3 10:00 AM Factory Orders
Jun 3 10:00 AM ISM Services
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