Energies

What is going on with oil? On one hand we have rising crude inventories playing against declining gasoline storage, and on the other hand we have a choppy currency market and possible sentiment change in the global economic outlook. Fundamentally the energy sector is bullish. However if the dollar remains strong it will dampen the bulls' hopes of a strong breakout rally. This market appears to be setting up a major spike on a few weak dollar days. The gasoline inventory issue is a real problem as refineries do what they always do which is play behind the demand curve. A rising stock market means strong economy, which translates to a weaker dollar and a rally in oil. Buy energies across the board on a break in front month crude above $55.

Financials

Stocks kept momentum going with fresh highs and a run through 880 on the S&P. This market is doing just enough to force some short covering, but the volatility event I have been waiting for has been nowhere to be found. I suspect we are on the cusp of a 50-80 point one day surge in the S&P, and the decline in the VIX sets up some long strangles to play the volatility. Bernanke testifies this week and I suspect he will downplay the recovery. The reality is the government pumped tons of stimulus and cut interest rates to near zero. If anything could create a false bottom it would be that. However I am not in that camp. I believe this whole recovery can be sustained if sentiment is strong. Consumer confidence is key and will create a trickle up effect if spending increases. The stock market strength sparks investor support, which creates consumer confidence. If the rate of decline continues to slow and sentiment stays strong then there is little stopping the economy from turning around and the S&P from running to 1100 faster than you would think.

Bonds broke lower on the FOMC meeting announcement, which was bland compared to recent meetings. Expect a run to 118 or lower on the 30yr. off of continued upside in the stock market. The dollar could get choppy here as a strong stock market is not necessarily bullish for the dollar. A little pullback in the short term seems about right as the market has shown signs of congestion. If you are short the euro or pound stand aside for a week or two. The yen remains a short, along with the Peso which just cannot catch a break.

Grains

The month of May brings a fresh feeling of optimism to the grain sector as beans continue to lead the charge to higher prices. In the end you can throw the economy, and demand as a whole, out the window because this time of year is all about the supply. Will we be hot and dry or wet and cool? Will we get everything planted in an optimal time frame? Will all the meat in the world be slaughtered and leave nothing out there to feed on our grains? This is the time of year where we see questions without answers. So let's speculate. I see 2009 as the year of the surprise rally. Corn to $5 and wheat to $7, sparked by a summer drought. Beans make an epic run to $15. Rice maybe not so much. Oats - do they still trade oats? These are summer runs here folks and that means get in soon with straight calls and bull call spreads. Avoid futures as the risk-reward at current prices makes it not worth the exposure in my book.

Meats

Well last week's change in market views for me was a bit fortuitous, as swine flu took the market by storm. I know a lot of you wonder why prices would plunge since we hear story after story of slaughtered pigs around the world. The reality is this is the Mad Cow effect. The world stops importing pork for what could be a long time and that means demand shrinks on a massive scale, easily outweighing the short term supply drop due to slaughter. Now do not get too caught up in this because pigs definitely caught a bad rap and with some good PR it might smooth over sooner rather than later. In the end, though, do you really want to trade swine flu news? Just seems like there are better markets to trade out there. An interesting question would be does the negative PR for pigs mean more cattle demand? I would say in the near term the answer is yes, and that makes cattle a buy.

Metals

In 2008 gold was the place to be. India, China and the rest of the world couldn't buy it fast enough. The dollar rally was almost meaningless, which means the foreign appetite for gold was so strong they paid a significant premium in the latter part of 2008. 2009 is a different story altogether. Mines are pumping it out as fast as humanly possible and, despite the gold bugs of the world best's efforts, there is little demand out there for the stuff. This slow choppy decline is the perfect setup for a massive liquidation event. Does gold down $100 in a day sound impossible? Well, to me this market is screaming for it. Silver could be in even worse shape as it has been artificially inflated during this run and I expect a full walk away by funds in this market when the plunge occurs. Puts remain pricey by my standards, in both markets, but I like short term ratio breakdown put spreads and synthetic shorts. Copper bounced on some near term support, and if the stock market makes the bull move I suspect it will then copper could see a leg up here. However, the real trade in copper is to the downside long term as this bounce will be short lived.

Softs

Coffee spiked this week as short covering brought the market above 120 (can you believe this market is still holding perfect trend line support since 2001?!). Look for a move to 135 as early as this week. Uganda, Honduras, Brazil and others are all going to come up short this year and the market is going to have to wrap its head around the idea that 2009 is the year of the supply shortage rally in coffee. Cyclically speaking we have been waiting for this for nearly a decade. Cocoa continues to be a short as I feel the highs are in. This market just doesn't have the fundamental issues it had in 2008, and the run for chocolate demand disappeared when the economy faultered. OJ remains a seasonal and value buy. Sugar broke out and is very bullish, possibly supported further by a run in corn and oil in coming weeks. Cotton remains on top of the list of bullish commodities in 2009. Lumber remains an economy bull play.



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.