The stock market and many commodities have been on a tear in the past month as optimism about the end of the global recession is spreading. We aren’t feeling the world is coming to an end. The attitude toward risk is changing. Traders and investors are feeling more comfortable.
That said, we are not out of the woods yet. Banks will need more capital. Jobs are still diminishing, if at a slower rate. While I think the low is in for the stock market, this month I think we could see a reasonable correction. Crude oil, which has been tracking the stock market higher, also seems to be getting ahead of itself and should pull back this month. Let’s take a look at some major themes for the markets.
Stock Market
The strength of the stock market recovery has amazed even most analysts on Wall Street. The S&P 500 has rallied more than 30 percent since March, and is now positive on the year. The market is looking forward. What is the stock market saying? We can see the light at the end of the tunnel. Federal Reserve Chairman Bernanke recently said he believes we’ll see positive GDP in the last half of 2009. There is a lot of optimism out there.
There are a few things we need to keep in mind. The bulls have been cheering the fact that the rate at which the U.S. is losing jobs is diminishing, but we still aren’t creating new jobs. We lost 3 million jobs in 2008, but we are still on track to lose 2 million in 2009. Just because we aren’t losing as many jobs, doesn’t mean all the people that lost their jobs will suddenly get new ones. We need job creation. Wall Street has been cheering first-quarter earnings news. It’s easy to have better-than-expected earnings when you lay off 20 percent of your work force. Your payroll has diminished. I do think the market has bottomed, but we have moved too fast. The market needs to digest all this news. The housing market still needs time to recover. We still have a lot of inventory. If the market pulls back, consumer confidence will likely waver too.
April had turned out to be a more bullish month than I thought. At that time, I thought the S&P 500 would back off. I still feel the market is due for a correction, perhaps now even more so; the market has been up seven of the past eight weeks. A move up to 937 in June S&P futures looks like a good place to consider setting up short positions for a possible pullback. Remember the phrase: “sell in May and go away.” If it proves to be true in terms of investor sentiment, the charts would reflect a near perfect-head-and shoulders pattern. We have a small “V” formation right now, but if the S&P futures back off to 840 – 780 in May or June, we should see the completed head-and-shoulders pattern. After a downturn, I’d watch for the market to break the neckline and power back up to 1,100 longer-term, in the fall.
Treasury Market
About a month ago, June Treasury bond futures were trading near 129-00 and there were plenty of good shorting opportunities down to 122-00. Last month, I recommended selling rallies in Treasuries, but if we see the stock market correct, we should see unwinding of bond shorts. I’d consider being a buyer around 120-00. I don’t think the Fed wants mortgage rates to uptick too much, and they might try to stop it.
Commodities and Seasonal Trading Strategies
Be prepared for the next big commodity bull market, as inflation is going to be the next buzzword out of people’s mouths. Crude oil seems to be taking the lead. In the first few days of May, crude oil futures hit their highest level since November 2008, trading above $56 a barrel. In general, I recommend buying big dips in commodities until the third week in May.
In mid- to late-May, we have often seen liquidation of longs in crude oil. I expect that to be the case this year. In the past few months, crude oil has been rallying along with stocks, and not following supply and demand fundamentals. The latest weekly crude oil inventory report from the Energy Information Administration showed less supply than expected, which is bullish, but the market has been rallying even when the supply numbers were not bullish. Investors and traders are looking ahead. Energy traders are optimistic. Demand is expected to increase as the global economy recovers.
In my opinion, long positions established in February - April should start looking to take some profits around the middle of the month. The rally in crude oil could die down if the stock market dies down. I see a move to $60 a barrel in front-month crude as the possible near-term top. Like the stock market, I feel crude oil is getting overbought. If the S&P 500 futures move down to 840, I would look for crude oil to move down to $50. Those two markets are likely to continue moving together so watch them both whether you trade either.
Turning to metals, gold has been basically in a trading pattern, although I wouldn’t sell gold right now. There are fundamental reasons you might want to stay long—namely the threat of inflation. Silver tends to get very weak, however. If you are bullish metals, you might consider getting long gold, and if you are bearish metals, get short silver. I can give you details on a gold/silver spread strategy if you are interested in that approach.
Turning to grains, we should know what’s in the ground by the end of May, which tends to mark a market peak. Some areas of the Midwest are behind in corn planting this year. If farmers can’t get corn in the ground due to poor spring weather, they will move to soybeans. The market will reflect that supply/demand shift, and prices for corn are likely to take off.
Watch every Monday for the crop progress reports, which often set the tone for the week. On May 12, the USDA releases its World Agricultural Supply and Demand Estimates (WASDE). This report gives an initial assessment of U.S. and world crop supply and demand prospects and U.S. prices for the 2009/10 marketing year. If you are trading agricultural markets, watch that report if to set the tone for trading. Late June and early July then brings new weather factors which can cause further prices shifts. If you were long grains, I recommend you get out and take a profit, and if you weren’t long, wait until after the May 12 report for good dips at the end of May to think about buying.
I believe selling coffee futures offers one of the best trading opportunities this month. Coffee historically has seen some big seasonal peaks in May, even though that wasn’t the case in the last two years. I recommend selling ICE coffee "C" futures at $1.270 a pound, with a target down to $1.170. I’d put a stop at $1.280 – $1.290, where I’d then reverse and get long with a target at $1.400. You might think coffee looks bullish and could be headed for a breakout, but what I see from a longer-term chart view is a bear market. The market may move up to resistance at $1,300 before we see a correction. I’m looking for a close under $1.220 to confirm, and bring $1.070, and then $1.010 as possible downside targets. Watch developments in the main growing region in the Southern hemisphere.
Everyone is talking about swine flu (H1N1) which has caused hog futures to go into a freefall. I don’t like shorting hogs at this point, however. Leave that market alone for now. If you’d like to participate in a general commodity play (or even a hedge) for the next few months, consider the Canadian dollar. Canada’s economy is very commodity-driven, and should move in tandem with general commodity price trends.
These are just a few of my thoughts and ideas for the month of May. Please feel free to call me to discuss these or other markets, and to incorporate specific trading strategies for your account size and risk tolerance. Good luck and good trading!
Jeff Friedman is a Senior Market Strategist with Lind Plus. He can be reached at 866-231-7811 or via email at jfriedman@lind-waldock.com. Join Jeff for his monthly webinar, Friedman’s Futures Forecast, by visiting Lind-Waldock’s events page. You can view an archived webinar of this forecast at www.lind-waldock.com/events, where Jeff covers even more detail.
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