Forget All Calendar Data;
Commodity Markets Tied to the S&P's Hip;
Watch Out for The #1 "Hero-or-a-Bum" Trade of the Week
BY AL MARTIN
(10-5-08) Last week it became even more apparent that the only way to trade now is to simply ignore economic calendar releases in terms of general economic news flows and reports affecting individual commodities. It really doesn't make any difference because commodity prices across the boards are directly tied to the hip of equity prices now, and this tie-in is going to continue until this global financial scenario plays out, which will come this week. In other words, either there will be global economic collapse. Or there isn't...
What we can say, however, is that the rallies in equities that we saw Thursday and Friday were of course manipulated sell-offs to send a message to Congress and the Fed and indeed to all central banks and governments that more needs to be done. We already know what needs to be done, like the Fed emergency rate cut, for example.
Looking at the markets very near term, although I am a bear and have traded the equities exclusively on the short side for several years now, even I began to trade the "Spoons" (SPZ’s) from the long side in Thursday's and Friday's trade because the bulls are right at least on one thing -- on both a technical and fundamental near term basis, the equities are indeed deeply oversold. That's true.
In the bonds, basis Friday’s close, the Dec. long bonds at 120 are overbought -- and that can also be said. However all the boards are acting as if they were tied at the hip to the equities.
What was interesting to note in Friday's trade is that all of the boards (the softs and trops, industrial metals and grains) rallied going into the "financial bailout" vote. What’s interesting is although the equities came back in another "message sending" effort, you’ll notice that the commodities held on to the bulk of their gains, which I think signifies the feeling around the pits that you might actually see something helpful from the Fed or the US Treasury or someone else on this planet this week – like a rate cut by the FED or the SEC expediting the removal of the "mark to market" regulation.
However to make any longer predictions on commodities is simply impossible at this point because they are tied to the hip on momentary events. The commodities in general, if they show that the Fed and Treasury are still behind the curve, as it were, will all continue to move lower.
But remember -- the other side of that is that if market confidence can be restored, commodities in general are very oversold despite the fact that on a near term basis and in a bearish environment, we see many of the fungible commodities trading underneath their cash bids, which is very unusual. This then sets up potential "dead cat bounces" which could be quite strong in many of the boards, most particularly the equities.
Should the equities move a little lower Sunday night, I would look to be a buyer of the SPZs at 1100 – and then hang on. Because -- either that trade is going to be worth 70 points by the close of business Friday. Or you're going to get "busted out" on the trade.
So this is the #1 Roll-of-the-Dice Trade of the Week -- buying the "spoons" (SPZ's) Sunday night, particularly if you can buy them a little lower. Who knows what's going to happen? But this is the greatest trade of the week – the Hero-or-Bum Trade of the Week, as the old traders used to call it. This is a trade that will either be worth 70 ticks on the upside by the close of business Monday or...
You could also say this about the softs and the grains when the market reopens on Monday morning. Look at the Dec. Cocoa from Friday, and buy it even if you have to pay a little bit up for it. The Dec. Cocoa closed 2469 on Friday. You're going to see the Cocoa up $100 in Monday’s session. Or you're going to see it down $100...
Regarding trades -- you can not put out any viable recommendations on individual trades because everything comes down to what happens in the equities and bonds, and that’s going to depend on the actions of the Treasury and the Federal Reserve, as well as the other central banks and governments.
In other words, to put out any recommendations is useless.
However, if you want a Roll-of-the-Dice Trade of the Week, you buy the equities, or the grains and the softs, when they open, and that's it.
If confidence is restored, you're going to see a helluva "Dead Cat Bounce" You’ll see the SPZ’s at 1170 on Monday. Or not...
When you have average daily ranges in the "Spoons" of 50 handles (or 400 Dow points), intraday ranges of 2 whole points in the bonds at 64 ticks, and intra day ranges of $200 in the cocoa and 5 cents in the coffee, intraday ranges of $50 in the gold – it’s irresponsible to try to tell anyone which individual trades to make at this time.