I'd call what's happening in the equity market in the third and fourth quarter of 2008 the "fear factor," and a lot of that has spilled over into commodities. As we succumbed to recession, the U.S. dollar's rally has contributed to commodities' demise. I feel may be somewhat artificial, as markets tend to overshoot in both directions. In my opinion, the dollar is showing signs of decline, and early 2009 is likely to see commodities start to make a comeback.
The Federal Open Market Committee will make its decision on short-term interest rates at the conclusion of the Tuesday, December 16, 2008 meeting, around 1:15 CT. The market is pricing in at least a 50-basis-point rate cut in the Federal Funds rate, the key interbank short-term lending rate. I believe that speculation has contributed to the sell-off in the dollar in the past few sessions. The ICE U.S. dollar index futures, which represent the dollar's standing against six global currencies, fell 1.4 percent to 82.02 Monday, December 15, 2008. On Friday, the dollar hit a 13-year low against the yen.
Looking at continuous chart of the dollar index futures, we can see the strength of the market in September through November. The red line on the chart represents the eight-day moving average, the blue line the 21-day moving average, and green line the 50-day moving average. We've seen some crossovers in these moving averages that support ideas the dollar will fall further. (You can see the eight-day moving average crossing over the 50-day moving average and 200-day moving average in the chart).
I think there is room for the dollar to come down further, but it may bounce up a bit first. I'd target 85 in the dollar index contract as a place to consider setting up a short position using futures or options, for a near-term downside target near the 200-day moving average at 77 - 80. From a technical standpoint, I think we are getting good confirmation of a top in place. Technically the dollar is starting to break, and it looks as if the Fed will flood the market with dollars that could fuel inflationary trends in commodities going forward.
Dollar Repatriation Likely to Ebb
Short-term interest rates are headed to near zero. There has also been a lot of buzz about dollar repatriation, which may have run its course. The dollar has been benefiting from a safe-haven status, as net foreign purchases of U.S. securities were driven to a new high of $286.3 billion in October, according to the U.S. Treasury Department. We may not see so much money coming in from overseas going forward into 2009. The U.S. is likely to come out of recession before Europe and Asia, and policymakers will do what they can to support the market. For now, inflation isn't a concern, but it could be later next year.
I don't think we'll be back where we were at the height of the commodity bull market in 2008, but once things start to stabilize in equities, that should bring some investor dollars back to commodities. That should push prices up in markets like crude oil, which is showing consolidation and bottoming action. Although crude oil closed lower to start this week, we've seen higher highs and higher lows in recent days, which is technically bullish. Chart action suggests a move up, although still in its infantile stages.
S&P 500 futures are looking a bit better recently, although I think the market will likely be sideways to bearish for a while longer. There are problems in the economy and it will take a while to work out all the issues. However, the fear factor should ease a bit, and there will be opportunities. All this additional money that is being flooded into the market to help alleviate the financial crisis will bring a strong possibility for commodity turnarounds.
People are scared right now, and rightfully so. They are willing to accept essentially zero return, just to keep their money safe and are pouring into Treasuries. But once the stock market stabilizes and investors start looking for a place to put their money with better yields than Treasuries, I believe they will want to invest in regulated, transparent markets like commodities. I'm not looking for a big bull market, but I think the commodity markets are poised for a recovery in 2009. It's impossible to try and time the market, but once you starting to see confirmations of a bottom, it's time to consider buying. I'd be happy to help you develop appropriate strategies for your individual risk-tolerance and account size.
Michael Sabo is a Senior Market Strategist at Lind-Plus, Lind-Waldock's broker-assisted division. He can be reached at 800-798-7671, or via email at msabo@lind-waldock.com.
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