Life has been good if you have been long just about any commodity for the last year or so, but you know things are getting out of control when oil magnates in the Middle East are paying as much as $1 MIL for customized license plates. That being said, a variety of commodities are looking heavy and with the G-8 warning that we are “entering the danger zone” and with potential for a dead cat bounce on the dollar, we would recommend tightening up stops on your longs and step aside looking for commodities to back off short term. This will set up a nice long entry for several commodities from corn to cotton. Continue to monitor oil and the dollar as most commodities are keying of their direction.

Energies

August crude oil was up $3.58 for the week and is quickly approaching the $150 level with little signs of stopping there. We are overbought, we are seeing demand destruction domestically, volume has been light but as we said last week, $150 appears to be a self fulfilling prophecy. The true test is when we reach that level how the market reacts. Will all the longs let go or will the market start focusing on the $160 level? We are not suggesting long or short futures exposure but would advise traders that are looking to gain exposure to purchase $5-8 bull call or bear put spreads into September, now that August options only have 2 more weeks. $150 should serve as the next upside objective and support for now comes in at the 9 day moving average at $140.60.

We were in search for a break lower looking at the charts, but the relentless move higher in crude should support current prices and with another leg up in crude look for distillates to follow. Demand has been slowing in gasoline and you have started to see the effect in prices as we were only able to gain 1.4 cents last week and at the same time August heating oil gained 11.60 cents. They say the best time to buy an umbrella from a street vendor is on a sunny day when demand is low, the same may be true for heating oil. Heating oil prices are being supported by the building of inventories on the wholesale level ahead of the expected increase of residential usage when the weather turns cold and coupled with China’s hoarding of diesel ahead of the Olympics one month away. For well capitalized accounts we will start playing heating oil from the long side via futures and options looking to buy a break of 15- 20 cents. As far as RBOB it looks like the market is getting tired and although strength in crude and heating oil may support, we feel the only viable trade in RBOB is to be short against heating oil in the same month looking for the spread to widen. Call for more details.

The U.S. Department of Energy said that underground supplies of natural gas were up 85 billion cubic feet last week to 2.118 trillion cubic feet, less than expected. Supplies are now down 15% from a year ago and down 3% from the five-year average. August natural gas prices were up 31 cents on the week, but this is not a market that moves in a straight line; beware of the volatility; on Wednesday we had a 49 cent trading range or $4.900 / contract. We would caution the faint of heart because any significant weather news could send prices $1 higher or lower. We would continue to advise buying breaks simply because it continues to work. The call spreads we have spoken of should work into expiration, but we would not establish new positions and will start pricing September in the next few weeks.

Livestock

Bulls and bears will likely take a step back after futures open on Monday to gauge early-week market direction after being away from the action since Thursday. As for trades, we bought October 76 calls for clients last week and got positioned long December in lean hogs. We are looking for the most recent gap lower to be filled on a move above the 100 day moving average, back to at least 75.36 which would be a 50% Fibonacci retracement. MACD and stochastic should support a move higher and with confirmation we would look to add to longs.
Traders on Monday will look forward to the official start of the Goldman roll on Tuesday that will conclude on July 14. The roll will consist of funds moving some of their August long positions into October and possibly December in cattle. We are long feeders for our clients looking for prices to start trending higher soon. Last week August feeder cattle traded in a 2 ½ cent range but didn’t get anywhere as prices only gained 30 ticks. As we have been voicing, we are looking for buyers to emerge around the 50 day moving average where we sit currently. August live cattle were virtually unchanged on the week not wandering from the 9 day moving average on a closing basis. We have no trade recommendations here, but would entertain buying dips if prices were to get closer to the 102 level.

Financials

Stocks: The gradual slide south continues, but the selling hasn’t been climatic, which tells us that before you see a capitulation, the path of least resistance is down. If you have never heard of the “Hindenburg Omen” you may want to Google it because it indicates there is a 25% probability of a full blown stock market crash that will happen in the next 120 days. Wake up, last month was the worst June in 78 years and the first 2 quarters showed the worst performance in stocks since 1970. The Dow ended last week down 58 points or 0.5% to 11289. The S&P fell for a fifth straight week and gave up 15 points or 1.2% to 1263. The NASDAQ lost 70 points or 3.0% to 2245. We are officially in a bear market and although we could get a short covering bounce, we are not confident enough to call a bottom. Lighten up, hedge, diversify, shift into non-correlated assets…do something!

Bonds: The U.S. Labor Department said that the unemployment rate remained at 5.5% in June. Non-farm payrolls were down 62,000, roughly as expected. Non-farm payrolls in May were revised from a decline of 49,000 to a decline of 62,000. Treasuries were range bound last week and although we have a bullish bias being that stocks may rally irrationally, you could see some liquidation of debt that would take prices lower. We remain on the sidelines looking for a better entry for now. September 30-yr bonds find resistance at last week’s high of 116’16 and support at 115’00 followed by 114’22. September 10-yr notes should have trouble getting above 115’04 and on a pullback should be supported at 113’25.

Currencies

The ECB increased its interest rate from 4.0% to 4.25%, as expected. It was the first increase this year and puts the rate at its highest level in seven years.