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Welcome to the weekly resource brief where we break down opportunities in the dynamic commodities markets. The mandatory use of options allows us to control risk and take advantage of longer-term trends in the true Supply and Demand markets.
These futures options have many advantages and offer a more pure play with leverage on leverage benefits not available with typical equity options plays.
In addition to identifying profitable option plays, the intention is to educate, inform and even entertain with our discussion about the vital economic building blocks, Commodities, which are the underlying basis for all investments.
Briefing for May 1, 2012 - Follow the Leader and Vertical Cost Drilldown
Asset Correlation Equation
Though this commentary is devoted mainly to commodities, the equity asset class cannot be ignored for its macroeconomic market evaluation. A weekly analysis of stock performance in the broad sense via the major index scorecard puts global financials in context.
The broad based S&P 500 index surpassed the 1400 level again Friday to finish +1.8% higher up 24 points on the week. The NASDAQ jumped +2.3% and the Dow rose +1.5% over the five day period ending April 27th.
The continuation of the asset uptrend can be measured by the quarterly stock response to earnings announcements. Repeated worry about robust corporate profits puts traders on edge every market cycle. Any disappointment has been short lived as new index highs have consistently been achieved in the post crisis economy.
April did finish negative, down -0.8% in the S&P, for the first time in four months. With the index up 11% year to date and an excess of 70% of stocks so far from that basket reporting better than expected numbers the trend looks to remain positive.
Fear is Healthy, Inaction is Dangerous and Often Costly
Every major pullback selloff prior to earnings has been a buying opportunity in stocks over the last few years. The fear that expectations would not be met and reverse the bullish market course has unfortunately left many retail investors on the sidelines.
Bloomberg April 30th - "S&P 500 Halts Four-Month Advance Amid Global Economic Concern"
Analysts predict U.S. shares will rise enough this year to boost the S&P 500 to a record, even as Wall Street strategists say the best is already over for American equities.
Individual price forecasts for stocks show the combined projection for the gauge has risen to 1,569.74, according to analyst estimates compiled by Bloomberg. That compares with the October 2007 high of 1,565.15. At the same time, strategists who base their predictions on assessments of the economy say this year's rally represents all the gains investors will see.
Bullish forecasts are based on analysts' expectations that S&P 500 earnings will reach records every year through 2014 as stimulus by the Federal Reserve props up the U.S. economy."
An on again / off again tolerance for risk enters the markets every few sessions as the fear de jour puts asset up-trends in peril to some. An overriding concern about a slowdown in Europe and China has paralyzed the ability to see the financial opportunity.
The market action tells a much more opportunistic tale with prices where they are in spite of the potential challenges. Trading options can help smooth out some of the volatility with long term price objectives in mind if you buy enough time to be right.
With equities within striking distance of the month ago relative highs the other highly followed asset groups of gold and oil look poised for major gains. An extended resource price depression has seen the Commodity Research Bureau Index finally reverse higher from four-month lows last week. The CRB 300 level is an important weekly support to lean on for a buyers bounce.
At the same time the dollar index has turned lower set to act as a commodity catalyst as it approaches three month lows near 78. That coincides with the long held downside objective that is a halfway retracement of the December to January rally run up.
Last week the Resource Alert Briefing analysis covered the extreme reward to risk situation in silver as it sits at the $30/$31 level. Another supportive factor is the resilient tone in the sister metal gold. The powerful gold rally above $1650 sets up for an attack on $1680 and then the $1700 range pivot once again.
The multi year post crash chart below shows the nearly straight up moves in stocks and gold. These asset classes have moved together while having very different motivations. A couple months pause in gold looks to be the base for another leg higher. Trade the trends until proven otherwise...