Now That’s What I Call “March Madness”: The Commodities Sector’s Two-Week Rollercoaster Ride
Smart Profits Report: Commodities Corner
Monday, March 31, 2008
by Lee Lowell, Futures Options & Commodities Specialist, Smart Profits Report
From boom to breakdown in just two weeks!
If ever there was a great example of how volatile the commodities markets can be, and how fast they can move, the last two weeks just proved it.
Last time I wrote to you (March 17), most of the major commodities markets were booming and hitting all-time highs. But in just 14 days, we’ve seen a massive capitulation and sell-offs in those same markets.
Let’s take a look at some of the movers and shakers and see if we can figure out where things are headed from here…
The Crude Rollercoaster Continues
Take crude oil, for example. Perhaps in homage to St. Patrick’s Day, oil prices spent most of the time wallowing in green figures, as the price per barrel jumped to all-time highs around $111.
But in just three trading sessions, it endured a nasty $12 selloff. In dollar investment terms, that’s $12,000 per single contract alone!
But oil being the volatile commodity it is, the price came roaring back last week and recouped most of its losses, as it hit $108, before selling off once again to its current price around $100.65 a barrel. As I write this, that’s a loss that’s a loss of almost $5 a barrel in today’s session.
As you may know, I believe www.futuresource.com is one of the best websites for commodities prices and news - and you can graphically see oil’s recent volatility on this daily chart of oil futures.
With so many hedge funds and speculators in the oil market, it’s likely that they’ve been busily adjusting their positions to coincide with the end of the first quarter today. And there’s no reason to think the current volatility will end anytime soon.
Anything Oil Can Do, Gas Can Do Better
Natural gas is another big energy sector mover. And while oil grabs the bulk of the headlines, this market is even more spectacular.
For example, the front-month natural gas futures contract topped out at $10.365 per mmbtu two weeks ago. But within a few trading sessions, it got hammered back down to the $8.750/mmbtu level - a massive move of $16,000 per contract. Imagine if you were playing with 100 contracts…
And not to be upstaged by crude oil, natural gas also came roaring back just as fast. It has since regained a major portion of the selloff to its current level of $10.12/mmbtu. That’s another move of over $13,500 per contract. You can see these moves on this chart.
If you’re going to get involved in the energy market, make sure you stick with limited-risk option strategies like credit spreads. It will do wonders for your psyche!
Metals Lose Their Mojo
The metals market has also taken a few hard punches on the chin recently. In just a few trading sessions last week, gold and silver gave back all the gains they’d notched over the last month.
Specifically, gold managed to give up about $130 an ounce, silver got blasted for about $4.50 an ounce. At a glance, you can see that those are both big losses. But most media outlets never actually tell you what that means in dollar terms. So here you g A $13,000 dollar value per contract on gold and a staggering $20,000 per contract on silver.
Check out the gold chart here and silver chart here.
Hedge Funds Hold The Key
Many onlookers might hear about these tremendous upward and downward moves in the major commodities and wonder exactly why it’s happening. You can sum up most of it in just two simple words: Hedge funds.
I mentioned in my last update here two weeks ago that rampant hedge fund speculation is the main driver of such huge swings in price. And you can tie it to events in the stock market.
As you know, stocks have endured a miserable first quarter. Investors have barely been able to get a handle on their positions before the market lurches from one slump to the next. But as this news flashes across the television and Internet, remember that there are always folks looking to profit from it.
Cue the speculative hedge funds, eager to make some quick n’ easy money, as they withdrew their cash from the stock market and piled it into commodities instead.
Now, though, as the Federal Reserve rides to Wall Street’s rescue, slashing interest rates and assisting with the Bear Stearns bailout, stocks have recently enjoyed a bit of a brighter spell. And once again, the hedge funds are seeking to capitalize, yanking their money from those same commodities positions (at least for now).
Now, onto some “soft stuff”…
“Soft” Prices In A “Soft” Market
From buying fever to selling frenzy, the “soft” commodities have also endured their share of volatility. Just take a look at coffee, sugar, cocoa, orange juice and cotton and you can see the relentless selling over the past two weeks.
This isn’t something most folks think about while they’re downing their morning cup of java, but on a pure dollar basis, coffee has given up the most gains. As you can see on this chart, the price has sunk from $1.72 per pound all the way down to $1.26 per pound - a loss of $17,250 per coffee futures contract.
But it wasn’t alone. Sugar, cocoa & cotton have also given up sizable gains, with cotton giving up the most on a dollar basis at $12,000 per contract, as you can see here.
The Safest Way To Invest In The Commodities Sector Right Now
Two weeks ago, commodities were roaring ahead and few people saw such a major drop in such a short amount of time. But having done so, some of these markets may be approaching oversold levels, perhaps even heading down to support levels, where you could play a rebound with some small, bullish strategies.
If you feel like dipping into the commodities sector, remember that it can be a dangerous area for rookies who don’t know what they’re doing. As you’ve seen from the recent huge moves, you wouldn’t want to get tripped up and see your portfolio gets ripped to shreds.
You can mitigate this risk by sticking with limited-risk option strategies. And if you really want to cash in on these moves, you can always let me do the hard work for you and give you specific recommendations. That’s exactly what I do for my Triple-Zone Profit Trader subscribers on a regular basis.
For more details on that, plus how you can get your hands on my book - Get Rich With Options: Four Winning Strategies Straight From The Exchange Floor - check out my bio on the Smart Profits Report website.
I’ll catch you again here in two weeks.
Lee
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