The July 4 holiday weekend, often a watershed period in the grain markets, has proven to be a turning point for just about all commodity futures this year. Daily charts in corn, coffee, cocoa, sugar, and natural gas all show important multi-year peaks – and I mean peaks. Obviously, the second half of 2008 is unfolding in a dramatically different environment than the first half of the year. The reversals gained steam around July 14 (the Bastille holiday in continental Europe) as the crude oil market and soybean complex completed major double tops on the charts.

A Falling Tide in Commodities
I don't know what it is about three-day weekends, but throughout the years that I’ve been in the business, trend reversals seem to cluster around them. July and August have been difficult months for many commodities. Gold and silver, which had corrected in May but had been recovering nicely, have faltered with crude oil, after attempting to hang in. August gold futures fell to a 10-month low by mid-August. A falling tide lowers all boats. (I’m referring to a pullback in index funds’ long participation in futures as the tide pulling out.)

The chart of natural gas futures below has been the poster child of recent activity and illustrates the early July reversals, and how one must get positioned with the flow and never attempt to outwait activity. At some point, probably not too far from the recent lows, the market could find some support, but until a multi-day base has formed, let it trade out and wait.

Open interest in many commodities has been declining rapidly. I can only speculate whether that’s tied to traditional fundamental reasons, or possibly motivated by jawboning from the U.S. Congress about speculation running rampant, special investigations by the Commodity Futures Trading Commission, and possible legislation to lower institutional-size participation in energy and grain markets. Of course, pressure in the agricultural markets also has come from perfect weather in the U.S. corn and soybean belt after July 4.

In terms of specific trading strategies, I am bullish on corn and soybeans. In the short term, I would expect strong rallies to be sold for quick profits. Over the long term, I would expect soybeans and corn to rebound from the corrections we have seen. Soybean supplies are fairly tight and I think the selling has been a little over done. I am currently recommending vertical call spreads in both of these commodities. For specific prices please feel free to call me at 866-419-7698.

Fundamentally, yield prospects have increased enough to more than offset acres lost in flooding this spring, and reduce concerns about late planting. Large coffee and sugar crops worldwide, and some demand destruction in global energy use are likewise bearish issues the markets must deal with. A slowdown in the world economy squeezed by the high commodity prices of last few years, the ongoing credit crunch, and the collapse in new home construction in the U.S. are ongoing restraints on rising basic material prices.

Chinese economic activity may also possibly shift a bit lower as preparations for the Olympics, which are finally upon us, wind up. So, I think there are plenty of fundamental reasons that directional discretionary funds might keep pressure on most markets on near-term basis. The technical situation is also as troubled on a near-term basis. A glance at any commodity chart will show liquidation pressures have been intense into late July and early August.

Stocks, Inflation, and the Dollar
The flip side of commodity news has been a trading reversal back up in the stock market in mid-to-late July into August, especially in the beaten-down banking stocks. Will this turn out to be a short-term blip higher within a major unfolding equity bear market? Will recent markdowns in most commodity prices just be a blip with an ongoing multi-year bull run? At this point, it’s tough to say. Participants with short positions in stocks were overextended, and were squeezed, mirroring the stop-loss selling in many overbought commodity futures markets. Basically, the recent reversals in both reinforced each other, adding to the velocity of the reversals. I’d guess the commodity reversal will prove a bigger deal than the uptick in stock indexes at least through August.

Easy monetary policy has impacted the U.S. dollar, which I’ve left out of the discussion up to this point. The European Central Bank has looked better dealing with growing inflation, but this has not translated into much of a trending market for the currency. Generally, a stronger euro would help tip the balance to the resumption of the commodity bull markets down in coming months. So, the current waffling in the dollar/euro rate is confusing, given the fact that regardless of the bounce in financial stocks, the U.S. housing crisis is still kicking. Big write-downs are still coming down the pike. The Treasury and Federal Reserve’s reactions are likely to continue to stoke inflationary pressure, as both monetary policy and semi-socialization of the mortgage industry are unlikely to boost confidence in the dollar, in my view.

Where Do We Go From Here?
Fundamental issues impacting the markets for the second half of year include government decisions about ethanol, speculative position limits, and offshore drilling, among others. The presidential candidates’ positions on taxes, rebates, housing bailouts, the economy, etc. will also impact the markets as we head into the November election.

Weather (especially rainfall) in late-August for soybeans, frost issues in September for corn, and hurricane activity for energy, will always have to be dealt with. And of course, efforts in the U.S. and Eurozone to combat inflation—with possible increases in interest rates--will affect the markets as the commodity bull run has been fanned by the weak dollar and low U.S. interest rates.

I’m not going to even attempt to answer the question about how all these factors will play out. However, what I do see are plenty of opportunities ahead.

James Barrett is a senior market strategist with Lind Plus, Lind-Waldock’s broker-assisted division. He can be reached at 866-419-7698 or via email at jbarrett@lind-waldock.com.

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