Energies

Cycle Change: Natural Gas (in play)

Why has natural gas hit a cycle low? When identifying cycles it important to acknowledge key shifts in supply or demand components. Also, looking at technical confirmations is key. In natural gas this cycle low occurred in October, marking the third major cycle high and low since 2001. The market does follow general energy price fluctuations at times, but its correlation going forward will likely be inverse. The market is shifting into a unique category of being a targeted alternative energy source. This trend will likely expand demand over time while experiencing significant bouts of supply shortages, not unlike the current situation affected by a mere few weeks of extreme cold winter weather. The current weather panic in China, Europe and the U.S. highlight the shift in natural gas demand and its growth as a global energy commodity. This growth lacks the same expansion on the supply side seen in oil over the 10 year cycle bull run that began in 1998. This same factor is also a big reason why natural gas has experienced 4 significant price spikes in 8 years, as the market is very susceptible to supply inconsistencies and demand spikes. It is for this reason that I suspect a bull cycle began in October and should continue through much of 2010.

Financials

Cycle Change: US Dollar (just begun)

The dollar has had some historic cycles, but how can a currency have a cycle? After all the market does not have the typical commodity based supply and demand structure, so what actually causes a cycle shift in a currency? In currencies the basis for a cycle is more of analysis of whether a long term trend on policy shift has occurred. Currencies tend to maintain long term trends as economic outlook and monetary policy offer periods of years in which policy is implemented, not weeks or months. In the case of the U.S. dollar the cycles over the past 20 years have been long and pronounced. In 1995 the market set a secondary bottom, not unlike what the market did in 2009, and began a 7 year plus bull cycle. In 2003 the cycle high was in and a 3 year collapse retraced all of that 7 year move, only to be followed by additional selling until a cycle low was likely hit in 2008. A secondary bottom, formed by a near perfect double bottom on two consecutive monthly lows in November and December of 2009, has likely setup a technical cycle shift into a bull run that I expect to last 3-5 years. Technical confirmation of the cycle shift will occur if and when the market closes above the high set in April 2009. On a fundamental level the cycle is shifting based on the U.S. being the leader of a global economic recovery, as well as the inherent flaws in the unified euro currency's structure. If the euro is to lead the currencies it will have a difficult time as the countries that compose it all have different economic problems not addressed by unified monetary policy - a clear issue that will be exposed in 2010 and beyond.

Metals

Cycle Change: Copper (around the corner)

The copper market has hinged primarily on China and India demand growth as producers trail behind this expansion and race to expand operations. This rapid mining expansion, although downplayed by many analysts, will ultimately play a large part in the cycle top that likely is right around the corner for this market. How can one see a cycle shift coming in a market? Cycle predictions are simply supply and demand forecasts, and for copper the supply side is catching up with demand and demand, I suspect, is about to collapse. The supply side of copper takes a good two years to trail the demand needs, a downside of the mining industry. On the demand side can anyone honestly think that 2010 will offer the same or greater demand from China and India than in 2007? There is little argument to the current tenuous economic stability seen in these countries. China is raising rates - too early? Can growth be stunted by premature tightening? You bet. Will a strong dollar hurt the global demand for copper? This is likely the biggest growth restraint the copper market will see in 2010. Right now a major strike in Chile, very high hopes for global economic growth and low inventories have this market riding high with a short term commodity rally - this is when I become contrarian and also when cycle tops tend to occur.

Softs

Cycle Change: Cotton (in play)

Cotton hit a cycle low in late 2008 as major oversupply forced government subsidies on a global level to help stabilize plunging prices. Well the subsidies did just that. Moreover the global planted acreage of cotton is on a downtrend as profitability of other grains and general migration away from cotton supply is causing a cycle supply shift during a period of rebounding demand. This suggests a bull cycle is underway and I am seeing the strong secondary bottom in 2009 help catapult prices back into the mid-range of prices seen over the past two decades. Over the next 6 months this cycle shift will hit into high gear as I expect 2010 supply to come in much lower than anticipated while demand is stabilized.

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.