CTS Spotlight for the week of April 22nd, 2011

Hello and welcome back to CRI's CTS Spotlight,

04/22/11: In a week that saw the US Dollar almost hit its downside target (73.516) there appears to be a lot of cross currents effecting the broader commodity market. For example - Gold & Silver continue to move higher even though Platinum, Palladium and Copper are not. The tech. heavy Nasdaq is breaking out yet the broader market proxy, the S&P 500, isn't. And lastly, Cotton prices have topped in earnest (the focus of this week's CTS Spotlight) yet most other grains have not. Considering gold's lagging indicator status and the proximity of the US dollar to its well established downside target - aggressive long commodity traders ought to temper their enthusiasm heading into the seasonal topping zone in May.

This week, I thought we would take a look at the Cotton market from a weekly and monthly perspective. Here we can clearly see the dramatic bull market that has dominated for the past 2 years. Would anyone in 2009 have expected a 5 fold increase in price - NO! In fact, I would argue that Cotton represents an excellent example of the old cliche, Markets can remain illogical far longer than any of us can remain solvent'. The question I pose to those 'investor' out there is - does being long (given the recent price breakdown on a weekly basis) seem rational? 

Of course not - In fact, this is a great example of how dramatically commodity prices can swing and can literally destroy a small investor. Keep in mind that within the heart of the financial crisis, one could have bought all the cotton one wanted in the $.45/pound range. Now, for some unknown reason, that same pound of cotton will cost you well over four times that price - go figure. Having said that, there are those that are suggesting one ought to consider any pull backs as buying opportunity. I, as a rational investor, would disagree. For those considering a purchase, I have specifically included cotton this week as an example of coming to a market too late. Yes I would have endorsed a buy from the significant breakout (in 2010) at or near $.90 but now that the market has broken on a weekly basis, I might argue that long positions should be tempered until we see a nice weekly bottom come back in. This consolidation may take months to develop and may come in at substantially lower levels - one just never knows. For now - the bull run is over, so cool your jets bulls and new prospective investors - keep that powder dry! 

That's all for this issue of the CTS Spotlight,
Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com 

CTS Spotlight for the week of April 8th, 2011

Hello and welcome back to CRI's CTS Spotlight,

04/08/11: As the US dollar continues its slow grind down to the well established target zone (74.441 to 73.516) there is a general feeling in the market that the US economy itself is far from healthy. Of note this week, Eurodollars (our short term interest rate proxy) have established a bottom and reversed what looked like a well defined top. The implications suggest short term interest rates in North America are not going up any time soon. Indeed, the US Fed has suggested that its QE2 program will be extended into June '11. Looking elsewhere, many commodity prices have reversed their recent tops suggesting that the latest market correction was little more than an attempt to shake out the 'weak-hands'. CRI's S&P 500 blog has been attesting to this notion over the past weeks as very little 'technical damage' has been done even though the news headlines would lead one to believe otherwise.

 

The Eurodollar market is the corporate equivalent to the T-bill market. Where T-bills are guaranteed by a government body, Eurodollars are guaranteed by corporations. To understand how this market works think of a Eurodollar contract's price as the inverse of its interest rate. So if Eurodollars are trading at 99.60, then the interest rates paid is .40% (100 minus the price). The fact that the Eurodollars have bottomed in price suggests that short term interest rates paid by corporations to the holders of their paper are now NOT going up but indeed, may fall even further. This is very interesting because if one believes the North American economy is improving then Eurodollar rates should be rising. The fact that this very well established bottom has come in, suggests that the North American economy isn't as good as the media would lead us to believe and that indeed, one should expect the malaise of the past couple of years to continue. The question then becomes, when does this 'malaise-ness' get reflected in the rest of the market. CRI's feeling is that the stock market (and many of the commodity markets) have a natural tendency to rally into the seasonal peak in and around May. So CRI's words of caution this week are: 

Don't get sucked into the seasonal euphoria, this may be a very big trap...

That's all for this issue of the CTS Spotlight,
Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com  

CTS Spotlight for the week of April 1st, 2011

Hello and welcome back to CRI's CTS Spotlight,

04/01/11: After a month absence due to a family emergency, CRI is once again at the helm to help in understanding what is going on in this crazy world. First and foremost, the US dollar continues to point towards the mid 74 area so that means we still have a little farther to go on the downside. Having said that, I did notice this week quite a few markets have triggered stops and those that haven't are looking rather toppy. Considering the seasonal top that ought to materialize in the coming weeks (sell in May and walk away), one shouldn't be too surprised with the idea that trends begun after the US mid term congressional elections (last November) are starting to exhaust themselves. Trade accordingly - now is not the time to be taking big risks!

This week I thought we would take a good look at the Canadian bond market. As a proxy for commodities in general and a good barometer for demand for commodities from North America, Canada has been enjoying the benefits of growth at a very low inflation rate. That may be coming to an end - and the one market that will herald that end will be the bond market.

Two things jump out at me when I look at this chart:

1. There is a very well established double top breakdown in price (that occurred right after the massive equity buy signal following the US mid term congressional elections last fall). This will not only act as massive resistance going forward but also represents a major pivot in the perception of inflationary pressures within Canada itself. In other words, inflation is back and it isn't going away until a well defined bottom in price comes in.

2. This previous week's price action has confirmed a nasty looking bear flag pole formation (with help on understanding this technical price pattern please refer to CRI's FREE Chart Patterns & Formations seminar). This price action is bearish (confirming point 1. above) and implies prices want to move down into the 114 area. If such an event happens, it will also confirm a massive monthly top in price (with a break of the major support area in and around 117). While this is a trade-able price pattern, the risk (suggested stop point just above 123) means for every dollar you potential could make on the trade (going short at 119) you have to take twice the risk - not worth the trade in my opinion. Having said that, it is important to understand what the market is trying to tell us - Canadian interest rates are going up!

So to summarize, Canada and Canadian bonds are looking very risky at the moment. Interest rates are not going lower in Canada, they are going higher. Ironically - the Bank of Canada has been pounding the proverbial table for months warning Canadians of their very high relative debt levels and the potential disaster looming for Canada. Did anyone listen - I doubt 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