05/28/10: In a week that saw the US dollar push to new relative highs and another stock index break its stop point (Dow below 9869) one can't help but get the feeling the cliche 'Sell in May and walk away' has been proven right once again. One significant reason for the general pull back in the market - The historically steep yield curve (of a year ago) has been flattening. Short term corporate interest rates have been moving up (please refer to CRI's TTA on Eurodollars) while long term bond yields around the world continue to be pushed down. This market action suggests that economies are slowing in general and more importantly, the credit crisis of '08-'09 may be back on. Elsewhere, commodity prices in general are consolidating while this latest credit crisis plays itself out. This week I have pointed the spotlight on Cotton and how a natural 50% retracement of the '09-'10 bull market could translate into a nice little double in the options market.
Cotton: As stated on the chart above, the Dec. $65 put option for Cotton looks very attractive. Currently the weekly 50% level is just above $60 ($60.9) and there is a noticeable gap just below that number at $60. Should the December Cotton contract trade back to those levels this option will have an intrinsic value of $4.10 or more than 500% higher than current levels. Considering the risk on this trade is roughly $315US and the potential return is over $2000US one who can take the risk ought to seriously consider it.
That's all for this issue of the CTS Spotlight,
Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com
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