Into the Futures--April 4, 2016
Into the Futures – April 4, 2016
Will investors interpret Janet Yellen’s speech as a license to buy equities?
• Will the S&P set new highs within the next few weeks?
• Is the highly touted oil production freeze over before it starts?
• Will gold trade to $1200 before it rallies to $1250?
• What is the next move for natural gas prices?
It was a perfect storm of events encompassing both data and Fed speak that boosted equities to within striking distance of all-time highs. After Janet Yellen made it clear in a speech on Wednesday that the Fed would not be raising rates in April and would take an extremely cautious approach to the two planned this year equities had a solid base in which to build. On Friday the jobs number came in as expected at 215,000, the participation rate increased and adjustments to previous months were positive setting the stage for the late week rally. The term “goldilocks” has been overused recently but every number and figure came in just right. While government reports overwhelmed investors last week there are very few being released this one, but out of the ones that are, factory orders, ISM and wholesale inventories should be watched. Earnings begin this week and since expectations are low companies exceeding them should be the norm not the exception. The e-mini and the S&P have run into fairly strong resistance but with the Fed putting the rate hike on hold and a weakened dollar the place to put money will be equities. Investors won’t jump in like they have in the past but if the market begins to approach new highs and traders feel they are missing out the buying could accelerate. My bias is neutral to cautiously higher as I believe the same conditions that have existed over the last few years exist now. The first quarter starts slow and the economy accelerates. I was wrong about a hike coming and health of the economy according to Janet Yellen who stated that conditions now are actually weaker than December when they raised rates the first time. I don’t see it that way and more importantly I don’t feel it and I am not alone –consumer confidence is up. If the Fed wants to raise rates twice this year they had better do the first one soon. If it doesn’t happen in April the next opportunity is June and between now and then the markets could be setting up for a nice rally. I would have liked the mini to trade back to strong support numbers but through 2073 and technically it’s a buy.
The big news from OPEC last week was how the Saudis have voiced their displeasure at other oil producing nations and their failure to embrace the production freeze. Iran is the one the Saudi’s are most upset with as they have repeatedly stated they have no interest in cutting production at a time they are trying to get back to pre-sanction levels. At this moment Iranian production is about 500,000 bd—pre-sanction 2.5-3.0 mbd. And as it’s been pointed out the number 2 producer in the world the US has not been invited to the party. As if they would be. Freezing production is the easy way out—the Saudis want to boost prices without doing the heavy work. And without an increase in demand freezing production at record levels will do little or nothing at all in keeping prices boosted. Some analysts have stated this is the first step on the way to a production cut. I do not see it that way because the Saudis would have cut production when prices were $10 lower not at a time when they have begun to recover. And the Saudis have stated all along their desire is to keep market share and cutting production will cause them to lose that. The Fed’s failure to raise rates could weaken the dollar and provide a base for crude oil prices but that is all. If equity prices rally significantly it might lift crude oil but the market has decoupled and I don’t expect it to return with the force it had earlier in the year only because it’s a much more important relationship when the crude oil market is near its lows and the threat of bankruptcies from oil producers spill into the broader market. Managed money has increased the number of shorts held but long positions still outnumber them 5 to 1. Crude oil will be range bound from $33 to $41 and currently is trading in the middle of that. Demand for gas needs to be over 9.5 mbd or the market will test the lows. I see gas demand being just enough to keep it in the range. The US is still producing 9 mbd of crude oil when many thought it would be much lower at this time. My bias is neutral to lower but the market is in an area of little support or resistance so I will wait for a dip or a rally to trade.
Gold gave back much of the gains it made since early March but still held above $1200 and with the weak dollar and the indecision from Fed members it should hold these levels and trade higher from here. I believed conditions were right for a rate hike in April but that has been wrong and gold has a window till June for prices to rally. As mentioned the weak dollar will support gold but it will find support due to the inaction of the Fed—the gold investors who say the Fed won’t be able to raise rates have more arrows in their quiver. Much could happen to derail the Feds plan to raise rates in June and if they don’t then it’s difficult to see how they would be able to do it twice this year-- and that miss would rally gold. If the European and Asian economies falter that will give the Fed pause and boost gold. The latest COT report shows that hedge funds have added to their extremely long gold position with longs now outnumbering shorts 184,000 to 29,000. So, even as prices came off last week funds were buying. My bias for gold is higher and I will look for a dip near the $1200 level to get long.
Temperatures from the Midwest to the northeast have been below normal for the last few days but will be seasonable by the end of the week. Nat gas prices have not reacted to the unusual cold and supplies are likely to draw when the number is released on Thursday. The weather to start April has not been like March and that could boost prices. The latest COT report shows that managed money has covered about 10% of the short positions held and have added a few longs-- this is only slightly bullish as they do remain net short. The long range weather forecast calls for temperatures to slowly climb into the 60s in the northeast by April 12th but between now and then there will be days of above and below normal numbers. I am short natural gas but could cover as I think prices might be supported this week. My bias is lower but there could be a better area to short.
These are the numbers to watch:
The e-mini has resistance starting from 2067 to 2074, resistance above this runs from 2080 to 2085 and the resistance level above this runs from 2095 to 2103. Support in the e-mini begins from 2054 to 2047 below this the support runs from 2038 to 2032 and the support below this runs from 2025 to 2019 and includes the 21 day MA. My bias is neutral to higher but I would like to see a dip before I get long or for the market to trade through the 2075 area.
Crude oil has resistance starting from $3760 to $3830 and includes the 21 day MA. Above this there is resistance from $3910 to $3980 and above this the resistance runs from $4140 to $4190 and includes the 200 day MA. Support in crude oil begins from $3620 to $3570 below this there is support from $3450 to $3400 and includes the 50 day MA and under this the support runs from $3360 to $3310. My bias is lower-- with the freeze deal falling apart and gasoline demand met for the time being the market is a sell IMO. I would like to short the area between $3750 and $3830.
Gold has resistance starting from $1234 to $1239 above this there is resistance from $1233 to $1248 and includes the 21 day MA and above this the resistance runs from $1261 to $1267. Support in gold begins from $1215 to $1209 and includes the 50 day MA under this there is support from $1202 to $1195 and below this the support runs from $1185 to $1180. My bias is higher and I would like to buy on a dip near the $1212-$1205 support area.
Natural gas has resistance starting from 198 to 203 above this there is resistance from 210 to 216 and above this the resistance level runs from 221 to 227. Support in natural gas begins from 192 to 188 and includes the 50 day MA below this there is support from 184 to 179 and includes the 21 day MA and below this there is support from 171 to 165. My bias is lower—I am short—but not as confident as last week—the market could bounce due to the anticipated draw of supplies this week, but does remain a sell IMO.
Government reports scheduled for release this week will include:
Apr 4 10:00 AM Factory Orders
Apr 5 8:30 AM Trade Balance
Apr 5 10:00 AM ISM Services
Apr 6 7:00 AM MBA Mortgage Index
Apr 6 10:30 AM Crude Inventories
Apr 6 2:00 PM FOMC Minutes
Apr 7 8:30 AM Continuing Claims
Apr 7 8:30 AM Initial Claims
Apr 7 10:30 AM Natural Gas Inventories
Apr 7 3:00 PM Consumer Credit
Apr 8 10:00 AM Wholesale Inventories
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