Energies

A choppy energy market sector hovers near the recent lows as a strong inventory report combined with mild weather and a strong dollar to push prices lower in the near term. Natural gas remains a value buy, however this market sector as a whole is susceptible to wild swings in coming weeks, which means avoid futures in the near term. A possible Pakistan/Afghanistan issue might be brewing after reports on Friday of a U.S. missile strike.

Financials

The bailout finally goes through and the market reacts with continued selling. The Fed needs to, and likely will, cut rates in the very near future to turn this mess around. One would think that they have little choice given the lack of a rate cut last meeting and the poor initial response to the bailout package. Look for a great buying opportunity in stocks after this washout early next week. Calls are the play as upside volatility is still undervalued given the potential. Stay short term and deep out of the money. Bonds will likely test the highs as the rate cut mentality sets in, but I do not expect much of a push past 121 (if that) as the stock market rebounds and takes the inverse correlation to force bonds south from here. The dollar is rallying on the same concept we discussed before - the ECB cannot play catch-up to the U.S. which means a far worse European recession than U.S. fallout and the market is starting to see we are ahead of the curve by comparison. The ECB cannot, by its very structure, create a comparative bailout package and therefore is exposed to a far worse downside. The UK meets next week on a critical interest rate policy meeting and should cut rates, but too little too late in my book. Nevertheless the upside in the dollar is limited in the short term and is likely to stay range bound for the next couple of months, say for a few volatility spikes given the daily price action we are seeing.

Grains

Grains took it on the chin this week as the dollar rally put the kibosh on foreign demand, and bean inventories look quite strong. Throw in a solid wheat crop and we may have seen the highs in this sector after all. Another strike in Argentina may cause a little supply panic in coming weeks, although this is an ongoing issue that seems to have little influence on the grains. Long strangles remain a solid play as puts are undervalued and calls are losing premium during this sell off. As we dive into harvest I am suspect of the ahead of the curve selling we are seeing and would be biased to the upside simply as a contrarian ahead of the news. Rice remains a sell and is very unlikely to test the highs again anytime soon.

Meats

The quarterly hogs and pigs report showed a lot of supply hitting the market between now and year end. However, the market is likely to get ahead of what appears to be a supply trend shift as we approach what could be a multi-year supply high. Long term hogs are a buy and don't get too caught up in the long term price chart - we are not heading to the 40s anytime soon. The market is waiting for a value entry and I just do not think they are going to get it. Long calls are recommended.

Cattle remains weak as grain prices falter. Seek a value buy short term as an anticipated corn turnaround should boost prices through October.

Metals

The metals sector plummeted this week as the dollar surged ahead of bailout Friday. This is one wild swinging market and, as much as I expected the downside, I would not expect too much more of it. There is an outside chance that gold will plunge early next week to the 700-740 area and if it does I would scoop up some long term bull call spreads. Otherwise this market is a buy right after Wednesday to give this exposure to the downside a chance to subside. Silver is the best value in the metals and is a buy in the $10 area with straight calls for July '09. Copper is long term bearish in my view as demand dwindles and supply remains relatively constant.

Softs

Cocoa is tanking on the general commodity pullback, or so it may seem. This market is begging for a retracement to 2000 and this move looks like it may be its time to do it. Puts remain a value buy. Coffee is testing some important long term trend line lows and is a strong buy at these levels with futures (with put protection) or bull call/straight call approaches. Cotton is showing the potential to bottom in the mid-50s and I expect to see some strong upside in coming weeks. This market represents a great long term buy at these levels. Sugar is coming off and out of a bull channel in a very bearish way. This market is not worth trading at the moment. OJ got beat up this week and there is obviously more value here than the last few weeks that I have suggested a value buy. I am not dissuaded by the selling, but you need some patient money here to play this dip. Lumber is a strong buy with calls or even futures for the high risk taker.



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.