Energies

Wednesday's bullish inventory numbers shocked the energy sector off its recent lows, creating what could be yet another false retracement. The market has been experiencing this for three years - 3 steps forward and one quick step back. Hurricane season is upon us with exposure to weather, a Congress that just went away for a month and a weakening grain sector offering a spike in global buying and shipping based oil usage. Sometimes the gut is the only way to go and the gut says don't get caught up in this bounce. Crude is on its way to 105 and below, taking the rest of the sector with it. Natural gas inventories are stronger than expected and the play here is also to the downside with puts.



Financials

The stock market is choppy amid a weak economic picture, and is offering great premium collection opportunities during a period of decent volatility premium. Short condors are recommended. Bonds are choppy as well, with a test of 112 likely on the next stock market bounce. Overall bonds offer great premium collection with an intermediate time frame first standard deviation strategy. The dollar is on the rise, but this sector is about as choppy as I have seen in years. Options will just chew the time value away as it could take a few months to see the dollar make a serious bull run. Long term puts in the euro and pound are recommended and the Canadian is teetering on the edge of a major technical breakdown below 9675.

Grains

Wheat is holding some technical support despite an improving supply situation. This market is still susceptible to longer term supply issues as reduced acreage and low inventories create excessive upside exposure. Alternatively, corn is in a clear bear trend, confirmed by a break through July lows sometime in the next two weeks. Corn ethanol is in the decline cycle of its demand life, if for no other reason then the deflation of the government's subsidization program due to the obvious cause and effect relationship that demand had on global grain and livestock prices. This is cycle shift in a market that was at price extremes. What it sail down to 4.50 and take beans with it on a lagging ride. Beans are the place for put plays, with ratio breakdown spreads recommended along with straight put plays in both markets. Rice is still on a run to 1450.

Meats

Cattle on feed numbers came in line with estimates, but the mid-year numbers should create a bearish supply indicator to bring prices down along with corn's collapse. Unfortunately that corn-cattle correlation is stuck in hyper drive until corn fully retraces. Hogs remain a sell at these levels.

Metals

Gold and silver remain choppy amid a back and forth U.S. dollar and a somewhat supported oil market. Gold has three dynamics at the moment:

1) Inverse U.S. dollar correlation - gold is priced in U.S. dollars on a global scale. The cheaper the dollar the stronger foreign currency is to buy gold at what they perceive are discounted levels. However, if the dollar rallies this has the opposite effect and foreign buyers are stuck paying inflated prices. The single biggest reason that gold will fail from these levels is the dollar's strength over the next 6-12 months.

2) Oil inflation - inflated oil prices, or commodity prices in general, create a much higher annual inflation rate (9% sound about right?) than what the Federal government wants us to think. Gold is the world's inflation gauge so it would seem that as goes inflation, gold will follow. However, when prices in gold far exceed the annual inflation rate (by anyone's calculation) over the past 5 years or so, then it would seem that there is less of a true correlation and more of an exposure to the downside for the potential of a declining inflation rate in the months and years ahead.

3) Flight to quality - the reeling stock market is getting beat up on what many would argue is a complete economic meltdown - the perfect storm of inflation, bank failures and collapsing real estate market. When the normal source for investment disappears and investors become concerned over how to make a return on their money they turn to bonds and gold. However, this resilient market is not a screaming sell anymore. It is clear the Fed will take excessive and unlimited measures to support the financial markets, despite its long term negative affect.

So a strong dollar means declining commodity inflation and will likely be supported by strong economic numbers (at least compared to our friends overseas) which means there will be little, if any, flight to quality. This equates to a strong price retracement in metals over the next 6-12 months. Jump on board with straight put plays in silver and gold - even copper if you can find a bargain.

Softs

Coffee is getting beat up after a solid harvest in Brazil and nearly half of frost season gone by without much of a reason to buy. This is not the coffee market of old as it has become more globally diversified from both a supply and demand perspective. However, the trend is bullish and suggests a value entry at these levels. Cocoa is catching a bid as strong Ghana exports to China and a big time election in Ivory Coast in November gets closer and closer. I am a bear at these prices but this may not be an easy market to time. Long term puts or strangles would be the only way to go in my mind. Cotton remains a strong buy on low acreage and harvest issues in Texas. OJ is a value buy but is technically getting very ugly. Expect the unexpected there as a Florida hurricane is just around the corner. Buy the dip with straight calls. Sugar caught a very strong bid this week and reversed an ugly chart pattern. Can it break through 1450 and turn into a bull breakout? Time will tell, but this counterintuitive market is no long following corn prices. Long strangles here are a good idea after the market volatility drops for a few days.

James Mound is the head analyst for www.MoundReport.com, and author of the commodity book 7 Secrets. For a free email subscription to James Mound's Weekend Commodities Review and Trade of the Month, click here.