What goes up must come down, and the U.S. economy is certainly poised to see a slow-down this coming year. While many of the commodity markets have seen record prices thanks to a lack of supply and an increase of demand (such as grains), a slow-down from the world's largest economy will probably put quite a damper on these markets that ran out-of-control last year and could become very profitable for those traders looking to get on the short side.
Crude oil is one of the markets we see that should have a big breakdown this year. If the U.S. buys and consumes less oil, prices should fall. Reports have it that China is raising its interest rates to slow its growth, and it is also a huge importer of oil. Today oil is off about 3%, and we see it moving from the mid-$91 range down to the mid $80s, which should provide some support. We have been bearish on oil for some time as there is no reasonable reason why it has been priced so high.
Today we implemented a bear put spread on the March contract, buying an 88 put and selling an 84 put for a net debit of $1,050. Our greatest profit level will come in between $88 and $85. Our plan would be to sell the 88 on a bounce and let the 85 either expire worthless on Feb. 14 or buy it back if we think it will move back against us.
Wheat Play
We're looking at a similar trade for wheat, which has jumped 90 cents on the July contract (worth $4,500) in just three days! The old crop March contract, however, has barely budged, and we think it is poised for a fall.
March and July wheat are up about 10-cents each as we write, but are off their highs from this morning. We'll wait for a move down to jump with the flow and will look to buy a May 800 put for about $900 and sell a May 750 put for about $450 for a net debit of about $450. Like the oil trade, we will profit the most if May wheat drops under $8.00, but stays just above $7.50.
What Will Be Up In 2008?
We see a few markets that should continue their upward ways this year.
The U.S. Dollar, which has been beaten down to record lows, could make a recovery this year. We will wait, however, for the next FOMC interest rate decrease to measure how the market feels about the Dollar. If history repeats, the Dollar should drop if the Fed lowers interest rates (the Dollar will be less attractive for buyers as they will sell our currency and buy a currency, like the Euro, which has a higher interest rate). But history likes to throw curve balls every now and then, and if the economies in other countries start to slow, there could be a renewed flight to the Dollar since our down economy is already priced into the value of the Dollar.
The "soft" markets - such as cotton, sugar, orange juice and cocoa - are also looking attractive for a number of reasons unique to each product.
We like cotton because acreage is moving to other cash crops. It has had a huge increase in the past couple of days, and a pull-back should provide a new buying opportunity.
Sugar has also had a nice, measured run up and now in a side-ways pattern. We've been long the March 11-cent call for the past three months and are sitting on a paper profit of over twice our entry. We'll hold this for a few more days as expiration is closing in, but we're comfortably in-the-money and want to keep it that way. On a breakdown under 11.30 we'll get out, let it fall a bit, then get back in the May contracts at either a 12-cent or 13-cent strike.
We like cocoa also as supply appears to be tight for the rest of the year. On a sharp move up yesterday we bought a March 2200 call for $400, looking for the market to test the 2400 range and get out with a quick profit. Cocoa dropped a bit today, moving us just out-of-the-money, but we're confident there will be a push over the next week to probe new highs before this expires at the first of February.
Tomorrow we'll examine coffee and orange juice.
Have a great day, and good trading.
If you have any questions or comments please send me a note at davidbrown@midwestfutures.com.
Futures and options trading is speculative and involves a high degree of risk. The risk of loss can be substantial. Neither the information presented or any of the opinions expressed constitute a solicitation for the purchase or sale of any commodities.
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