Commodity Massacre Starting Tomorrow?
Tuesday, April 29, 2008 | Chris RoweRating:
I hope some of you have made use of my FREE "Twice-a-Week Market Wrap-Ups". Remember, every Monday and Thursday afternoon between 5:30 and 6:00 I post a video clip on The Tycoon Report website so if you like, you can spend 5 minutes or less digesting a summary of ...1. Today's market action
2. One important topic or event affecting your account
3. Where to find a bull market (There's always a bull market somewhere)
Click here to check yesterday's summary
Tomorrow at 2:30 you'll hear the Fed's decision on interest rates. Here's what you'll want to think about before that happens ...
Since late January, the Fed has cut rates by 2% to 2.25% in response to the credit crisis. In early April, fed funds futures indicated financial markets expected a quarter point cut with a 50% chance of a 50 basis point cut. But now as it seems the odds of an economic meltdown significantly declined, the financial markets are implying a 20% likelihood of no rate cut whatsoever and zero chance of a half point cut. The economy should get a fiscal boost because millions of Americans will be getting a tax-rebate check from the government.
How does this affect your portfolio?
Do you own commodity stocks? Commodity prices have been soaring lately, pushing the sector higher. But this might soon change, so if you're heavy in commodities, you might lighten up on the positions and/or hedge them with options (by selling covered calls, or by selling the stocks and replacing them with high delta options). But TODAY is the time to check your portfolio and be very honest with yourself. Are you too heavy in commodities?
Don't get me wrong, I'm not calling the commodity bull market top here. But listen to what could EASILY happen ...
Commodities are priced in the U.S. Dollar. When interest rates decline, the dollar weakens. (The dollar has been virtually cut in half over the last 5 1/2 years partially adding to the commodity bull run.) As the fed funds rate dropped a whopping 2% over the last 3 months, for example, we saw crude oil increase in price by nearly 40%!!! Gold jumped about 18% but then came back down to about the same level. At this point it looks like gold could be in for a big decline, and it's possible that the interest rate decision and/or the FOMC statement could kill the price of gold - at least in the short-term. (And you probably won't regret selling at A high.)
If the fed minutes cause a rally in the dollar, it could easily cause an intermediate term drop in commodities. This could take some pressure off of the stock market. I'm seeing lots signs in the stock market that the bulls have been sneaking up behind this bear and the nostrils are flaring. The bear has been pigging out here and consumer sentiment and stock market sentiment are both at historic lows. That means investors are ALREADY pretty close to being as negative on the stock market as they typically get. (That means much of the stock selling has likely already happened in the intermediate term which leaves lots of room for the upside impact of a change in sentiment from super negative to even slightly positive.)
Of course demand is still there for commodities because of global expansion. Crude oil is in higher demand lately because refineries are operating at their lowest capacity since the 2005 hurricanes (Rita and Katrina). But demand hasn't been the only force pushing commodities higher. The weak U.S. dollar has helped (for safe haven demand), and so has trading speculation. Strip those out and all we're left with is the LONG-TERM demand.
A good trader never tries to call the absolute top or the absolute bottom. But we could easily look back in a month or so and realize we were sitting in the nose bleed seats, even if it's a high point of a long-term uptrend. Watch yourself folks!
Remember, Mondays and Thursdays between 5:30 and 6:30 est. I record a quick (less than 5 minute) video summarizing the market for FREE. Click here to see what I'm talking about.
Here's one suggestion (forget shameless marketing, I'm dead serious here): Take a commodity stock position that you own. Sell covered calls on it (and collect a premium). Ask your broker to send you the premium and use it to purchase the "Internal Strength System". (That's how to get yourself a free education on how to make millions.) There you can learn all about how to accurately call the next move of any security. It also shows you how to pick the best option to trade, so that you can make the most of your analysis.
Until next week (or Thursday if you watch the videos!)
(Please let us know what you think about Chris Rowe's article.)
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“Profit from the Trend”
Chris Rowe
Chief Investment Officer
The Trend Rider
