Energies

Energy prices are testing the lower ranges of a sideways trading range, but are unlikely to fall further. Instead this may be a great entry to a long term bull play across the board. A shift in inventories shows a possible decline trend in crude and heating oil and an early transition to rbob supplies. This is actually bullish for the market because of three supply trend factors. First, an early supply run on rbob means a potential refinery abandonment on heating oil, with a pattern of late winter weather developing and a lack of strong supplies to handle it. Second, an early trend towards gasoline supplies can ultimately lead to a premature downturn if levels reach above historical highs for a specific point in the season. So, in essence, if we hit high levels in early April producers stop refining oil to gasoline and that leaves the market exposed to a hurricane spike in early summer. Last, but not least, the drop in crude oil that was over 3 million barrels lower than estimates could be a sign of the market's temperament as it relates to relatively low prices and a strong inventory level. In the end producers may be reaching the point of supply holdbacks to thwart declining prices.

Financials

Stocks turned nasty the past two weeks as a Geithner speech to nowhere started a run of panic selling as investors get worried about a government with no understanding of how to address the issues at hand. Then you got a bigmouth spouting thoughts of nationalizing BofA and panic really starts to set in. Bottom line here is that panic like this will have an ebb and flow, and as long as ludicrous ideas like nationalizing banks never come to fruition then these are great buying opportunities. The coming couple of weeks are likely to set the stage for the whole year in stocks. If we come out of this period with a solid outlook on our economic recovery plan there is likely a strong rally that will lift the stock market to levels few expect possible in the next few months (think 1100 on the S&P). If the government deals us a big letdown then I may be wrong in my outlook. I have never been much for relying on the government for successful forecasting, but in this case I feel confident that the contrarian view will prevail, as this panic has priced in a lot of the fear and there will be a great risk/reward ratio if optimism returns.

Bonds remain worthwhile for premium collection, but there is only a brief period remaining before bond prices attempt another leg down. The recent bounce is clearly attributable to the flight to quality that is occurring as the stock market tests the lows, and will quickly be erased on a stock rally. Sell calls, but be aware of not only the unlimited risk that exists but the exposure to a spike in volatility in coming weeks.
The dollar remains strong as forecasted, but there is a period here that should last until the beginning of March that leaves some doubt as to the near term dollar strength continuing. I ultimately expect the euro to hit 120, but if it happens in the next couple of weeks I would be OK missing the boat as it may be best to step aside from this play in the short term. The yen is on the cusp of a major failure, and a stock market rally is all that is needed to break bonds and take the yen along for the ride. Puts remain relatively inexpensive and an OTM synthetic short would be a good play with June 120 calls short, and 98 puts long. The Canadian dollar is unlikely to fail short term and remains range bound in my opinion for the next few weeks.

Grains

Fears of a worsening drought in Argentina, soybean rust in Louisiana, early wheat growth setting up frost concerns, and general weather issues are helping to delay the seemingly inevitable short term market failure in grains. While my forecast for lower prices seems to be happening, I have yet to see the big implosion which I suspect is coming very soon. If the stock market rallies it will likely cause a bounce in grain prices, despite the lack of a true correlation there. Bottom line, though, is that $8 beans is very possible before March, and will take wheat and corn along for a ride. Buy puts on bounces, about 10% OTM for May/June expiration.

Meats

A grain tumble this past week spanked the meat markets, bringing strong selling to cattle and hogs and breaking a quasi bullish trend development in both markets. This sector remains a sector worth avoiding, but these bear trends may actually get some life to them. Remember cattle used to trade 50 to 70 cents. In fact it was not too long ago that 80 cent cattle used to be referred to as a historical top.

Metals

Gold and silver continued their impressive bull rallies on a flight to quality play, laughing in the face of a U.S. dollar rally. I must admit I have always been one to play the dollar/gold correlation because in the end it is essentially irrefutable in my opinion. After all, the gold market is priced globally in dollars and any time gold diverges from the correlation it is acting short term on an independent demand. I say this because it doesn't matter what your opinion is, if the euro drops 20% against the dollar then gold is 20% higher to those countries if underlying gold prices remain the same. In reality, gold has risen just about 18% since December 18th, while the euro has declined about 13% over that same time frame. This means a more than 30% comparative increase for those buyers, or the equivalent of gold rising from $850 to over $1130 in U.S. dollar terms in just over 2 months!

Gold is diverging from the dollar as a flight to quality takes hold of the market - or so it seems. What I believe we are really seeing is buying ahead of a forecasted flight to quality. The market is not truly panicked - there is no run on the banks just yet - but rather a fear of this occurrence. So the gold market fights a dollar rally and makes a run at the highs - sounds like a perfect reason to see a secondary top and a complete failure when calm comes over the market in coming weeks. What will cause this calm you ask? Honestly I have no idea - could be something as simple as Geithner providing a real plan for the bailout money and tarp or any other of a myriad of possible bullish turning points the government could create - it doesn't matter what it is but rather the overriding principal here is that gold rallied ahead of any true realized panic. That means people are buying the rumor and when I see that I sell ahead of the fact using puts.



Softs

Coffee is getting beat up along with a softs sector selloff. Look for a strong reversal rally this week above previous supports as Vietnam is likely to holdback supply on government subsidized loans to producers. Moreover, a low production year for Brazil and a spike in Arabica prices in India has a perfect storm brewing for a supply shortage in coffee in 2009. Buy the dips. Cocoa is on the way to 1500 as a December demand spike is now being realized as a one-off surge, and the caterpillar infestation scare is essentially over. The bottom line for cocoa is the high is in. Cotton is stuck in the path of a grain plunge, but overall is bullish and a value buy at these levels. Acreage drops in the U.S. will overcome an excess carryover inventory and net out will cause a cycle shift in the supply of cotton in 2009 and beyond. OJ remains a value buy. Sugar is topping after breaking through 1300-1320 resistance and is a sell until fresh highs are seen above those levels. Lumber is a buy on the recent dip and should see strong buying on any support in the stock market.

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.