Energies
Continued strength in oil and gas this week came on the heels of yet another bullish inventory report and breakout technicals forcing short covering rallies. This market remains bullish ahead of confirmation of major supply or demand issues or even the hint of a hurricane. Imagine the bull move that would occur if geopolitical tensions with Iran heat up or a Cat. 4 heads toward the Gulf! Long term I see the energy markets as over priced and capable of a complete collapse, unlike many bulls that believe we are in for a long term supply problem with rising prices forecasted from now until eternity. However, the short term technicals and apparent near term exposure to fundamental problems suggests that this market be bought on dips through the end of August. Keep in mind that if the market does not get a hurricane it will slowly evaporate that premium which could combine with the end of the summer seasonality demand and cause a massive selloff. So stay long for now and buy the dips, but be prepared to turn short in a little over a month as you will want to be ahead of the seasonal curve. Natural gas prices fell once again as prices stumble amid rising inventories and the commencement of production of the Independence Hub in the Gulf of Mexico, which is projected to produce as much as 1 billion cubic feet of gas per day by the end of the year. Overall the natural gas market is still holding a reasonable price level near the bottom of its long term channel and should be bought up for a 30% runup or more if a hurricane plays havoc with the market.

Financials
Stocks have beat off every bear move like it was nothing, causing momentary shakeouts to reverse faster than a speeding bullet. However, even Superman will have a hard time holding this market up as a lack of LBOs and mutual fund liquidation will be the kryptonite that kills this market. The rounding top formation immediately following a break to new highs and a Friday plunge that closed in the bottom 33% of the range is a strong combination and an indication of the market’s inability to shake the next big plunge off as easily as it has in the past. More so than any other decline this year, the current market condition is indicating a major bear move.

As with any semi-intelligent contrarian play in the stock market you should wait for some technical confirmation, which would come in the form a break in the S&P below 1531. This would break a gap on the open outcry S&P and a strong trend line support. Waiting for a moving average break here would be tantamount to not trading this market, so focus on the parts of the chart that show the momentum shift. High volume volatile one day declines that have follow through reverse bull market momentum, and Friday’s action appeared to be the start of just such a move. Keep in mind that the funds have had an unbelievable first half of the year and the typical fund manager gets paid big bonuses on annual performance. As you can see in the S&P chart below, funds have had an incredible 12 month run, but their annual performance is based on calendar year and quarterly results. They are more likely to get scared out of the market and into a cash position if they see the market receding and seeing their solid YTD gains evaporating. If the average fund took profits today and made a treasury bill return the rest of the year they would most likely still outperform 2004 and 2005 and put a strong test to last year’s numbers. Last year showed us what a half year could do, turning a flat market mid-year into a double digit winner by year end. This year appears to be setting up the reverse and I highly recommend developing long term bear positions in the S&P now.



Back-to-back Bernanke testimony sparked a general market fear, as negative talk of a housing collapse shook the bond market and forced rising prices and tightening rates. An outlook for slightly lower core inflation also creates the potential for increased sensitivity and volatility to CPI and PPI reports in the coming months. Look for a test of 110 and continued volatile and choppy trade in bonds with opportunities to sell premium on selloffs. The dollar is in dire straights, but Friday’s hold above 80 at least keeps it above water for now. I remain in the bull camp and expect the dollar to bounce off of these levels as it has done several times in the past. The euro and pound are exposed to strong potential retracements after their recent speedy rallies. The yen is a strong sell here and the Canadian dollar appears toppy.

Grains
Major selloffs early this week were sparked by unexpected rainfall in key growing areas. Wheat held up better as that market’s supply situation is already in ruins. Everyone plays the short term weather, but the long term outlook remains the same – buy the grains. This is an excellent opportunity to scoop up beans and corn at values not seen in some time and to buy call options that have had their volatility premiums sucked out of them.

Meats
Strength in hogs is less of a signal of a bull run and more of an indication of the market’s inability to breakout out of the longer term midrange. Bellies are in a freefall from historical highs, mainly due to rising inventories, but are a high risk short. The cattle on feed report from Friday showed a 1% drop, year-over-year, and it was a bit under expectations. However, the market has had a habit of playing opposite the news following recent feed reports and should continue the recent technical downturn on its way to test critical nearby supports at 89.45 and 88.25. This is a market worthy of put plays.

Metals
A strong surge in metals this week came on continued selling pressure in the dollar and rising oil prices. Throw in some housing turmoil and the market has a lot of fuel to test recent contract highs. As I expect to see near term support in the dollar, and have the anti-inflation backing of Bernanke’s testimony this week, the play here is put buying and premium collection on the call side of gold and silver and a straight deep out of the money put play in copper. If gold closes above $705 then all bets are off, but watch out for an intraday breakout and then failure. I recall a breakout through the once critical $430 mark to set an intraday high at $433, a breakout over 8 years in the making, only to ultimately come crashing right back down. To me this move is a suckers rally and I suggest waiting for solid confirmation before getting caught up in it.

Softs
OJ saw some strength this week ahead of a cold storage report after the close on Friday that showed a year-over-year drop in storage of 18%. This market is overdue for a rally, but needs a hurricane to truly get shorts to cover. This may be the first step, but overall this market is in need of some weather. Coffee began to show signs of a technical turn to the upside, but needs a break and close above 120 to truly turn momentum bullish. I remain a buyer. Cocoa is well above 2000 and is still a breakout bull buy. Cotton plunged as Brazilian supplies (45% increase year-over-year) have the market taking profits and turning south hard and fast. I haven’t seen cotton this volatile in years, which brings life back into this long time dead market. I continue to see volatile and choppy trade, but overall the market is likely to give all these recent gains up. Sugar broke through 10 and is capable of seeing 11.50 before even coming close to testing Fibonacci resistance. The market could easily make another historic run and now it is too late to buy calls as the premiums have been pumped back in.

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.