In October, the U.S. dollar was the driving force for commodities, and the weak dollar brought strength in the gold market in particular. I see the dollar remaining the dominating theme in November for commodities, but stock indexes may struggle a bit.
Gold has reached a new all-time high in early November, rising to $1,090 per ounce on Wednesday, November 4. Many other commodities have also been experiencing bullish trends. Crude oil rallied above $80 a barrel, sugar is nearing a 28-year high, and corn is above its 10-year average near $4 a bushel. What does this all mean? Does it mean we have inflation? The Federal Reserve, in leaving its key short-term interest rate unchanged at 0.25 percent at the November policy meeting, is saying no. I’m not so sure, at least when you look at some of these commodity prices.
At its regular policy meeting on November 4, the Fed said it would keep interest rates “exceptionally low” for “an extended period.” They keep auctioning off a lot of Treasury securities to finance stimulus and buying mortgage-backed securities to keep rates low.
For the month of November I recommend buying dips in commodities in general, as the dollar should remain weak. Corrections could be large—so expect some volatility. Continue to watch the dollar, and the employment picture too. An uptick in the unemployment rate will hurt the stock market. Employment is holding the economy back, without question. I believe the Fed wants to see if the consumer will spend during the holiday season before reassessing its outlook.
Commodities and the Dollar
Gold has exploded over the past few weeks, and rallied some $60 in just three days’ time. During October, the Bank of India bought 200 metric tons of gold from the International Monetary Fund for $6.7 billion, a huge purchase. That caused some massive short covering. Gold is up about 24 percent this year, and the overriding fundamentals remain bullish long-term, led by continued dollar weakness, and the potential for inflation in 2010. This market could go to $1,400 within a year.
While I think gold should remain strong in November, a seasonally strong time of year, for now, I’d recommend waiting for pullbacks to consider buying. A correction to $1,065 (a breakout level) looks like a good place to buy December gold, and down to $1,048 and $1,030 as well. I see $1,000, holding as support this month, which was former resistance.
Gold, weekly chart
Crude oil tends to be seasonally weak in October, and in contrast to my ideas on gold, I think its rally may run out of gas. I would recommend selling crude oil futures on rallies, and a move to $85 looks like a good place to establish a short-term position. Elsewhere in the energy market, I think natural gas should firm up toward the end of November, around Thanksgiving.
Corn remains in a long-term bear market, but it is beginning a strong seasonal period, so I’d buy dips in corn for a short-term bounce. If you can get December corn at $3.60 or $3.50, I think those levels represent a good value to consider buying.
We know the U.S. dollar has been supporting gains in commodities, as many commodities are priced in U.S. dollars. Looking at a chart of the U.S. dollar index futures, which track the dollar’s standing against a basket of six global currencies, you can see how the U.S. dollar has been on a downward trend this year. Drawing a trendline shows if the dollar manages to close over 78, it could end the bear market in the dollar. But I don’t see that happening. If the trend in November is anything like it was in October (and I believe that will be the case) a move under 75 would bring an explosion in commodities. We’ve been there before, in 2008.
Dollar index, weekly
From a technical perspective, to me the 10-year Treasury futures look ripe to sell this month. If December 10-year note futures rally to 118 – 119 consider establishing a short position and risk a point. The weekly chart shows a downtrend. The market could get up to 121, but from how the chart looks right now, I don’t see much more upside. Why? Huge supply, and potential inflation. If we don’t get enough foreign buyers of our debt, they will require a higher rate. Eventually, rates will have to move up. The Fed is going to run out of bullets to keep rates low.
10-year Treasury note, weekly
Stock Indexes
This week, famed investor Warren Buffett made the largest purchase ever on behalf of his company Berkshire Hathaway, by purchasing Burlington Northern railroad for $34 billion in cash and stock. That’s a long-term commitment to the economy, and if you are a believer in Buffett, that should make you a believer in the economic recovery. However, there could be some bumps in the next couple months—namely the employment picture. Watch the October employment report on November 6 to set the tone for the market in early November.
The stock market tends to see bearish trends in September and October, but that wasn’t the case this year. We could see a correction in November and/or December instead, and I think what is dubbed “the Santa Claus rally” into year-end will be subdued this year. I think we got our holiday rally early this year; we could see the trend reverse from typical seasonal patterns this year and the stock market could experience some corrections into year-end.
A look at the charts shows 1,080 would be a good place to consider selling December S&P 500 futures. I wouldn’t buy until the market pulls back to 1025, and possibly 990.
S&P 500, weekly
These are just a few of my thoughts and ideas for the month of November. Please feel free to call me to discuss these or other markets, and to incorporate specific trading strategies for your account size and risk tolerance. Good luck and good trading!
Jeff Friedman is a Senior Market Strategist with Lind Plus. He can be reached at 866-231-7811 or via email at jfriedman@lind-waldock.com. You can follow Jeff on Twitter at www.twitter.com/LWJFriedman. Join Jeff for his monthly webinar, Friedman’s Futures Forecast, by visiting Lind-Waldock’s events page. You can view an archived webinar of this forecast at www.lind-waldock.com/events, where Jeff covers even more detail and more markets.
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