Today marks the first official trading week of the year and everyone is searching for clues as to where cash sitting on the sidelines will be put to work. Much of that money has gone into the Treasury markets, which made a phenomenal move to the upside last year. We know investors have been risk-averse, and therefore, have flocked to safe-haven investments such as Treasuries.
The 30-year Treasury bond tends to worry more about inflation than the rest of the curve, and faced a dramatic sell-off on Monday, January 5, 2009. Treasury bonds could fall further, but I would use caution in this market because it could struggle with supply issues. Some of this price action was spurred over worries that the government is going to have to issue trillions of dollars of debt to pay for all the stimulus programs currently underway, as well as new ones being proposed by the incoming administration.
The Federal Reserve has a $500 billion program to buy mortgage-backed securities because they want to bring mortgage rates back to 4.5 percent. The chart of the 30-year March Treasury bond contract looks bearish and I recommend trying to short Treasury bonds around 135. You can expect a lot of volatility ahead of the December employment report coming up on Friday, January 9.
A reading worse than 7 percent in the unemployment rate, or a terrible non-farm payroll number of the magnitude of 600,000 to 700,000 will be bullish for the Treasury bond market, in my opinion. In anticipation of those economic numbers, the best day-trading option may be to stay flat because of the chance of tremendous volatility. On a strictly technical basis, this market currently looks bearish, however
Israel has been pounding the Gaza strip, and that’s certainly given crude oil a boost. The crude oil market is also being pushed higher because OPEC has been cutting production. Some are looking for this market to bottom out. Crude is challenging $50 a barrel, and I think $35 could be the floor for this market.
Higher crude oil prices have also given the grain market a boost. Demand for soybeans has been extremely strong. The March contract broke above a trendline on a daily chart, although it has been struggling around $10 a bushel and may not be able to break it this week if the employment figures are bad. Two closes above $10 would be a buy signal.
Corn was impacted by the drop in crude oil and closures of ethanol plants, so it hasn’t been as strong as soybeans. The new agricultural secretary, Governor Tom Vilsack has been a staunch supporter of ethanol mandates that require ethanol to be blended into gasoline. If he has influence, that could put a floor in place for corn. I view $4 a bushel as support right now in March corn and a good buying entry point, with room to move to $4.50.
Wheat has also been strong, but is currently in consolidation mode. Some analysts are projecting 15 percent less planting this season, which is bullish for price action in 2009. The nine-day moving average has been working as a good support level for grains as of late, and it comes in around $6 in the March wheat futures. That’s where I’d look to buy, with a stop about 10 cents away.
In general, any situations pushing up the crude oil market are likely to push up grains. Corn and soybeans only get planted once a year, and they’ve had a tremendous drop. Demand is higher, so there are good fundamentals in place. There is a crop report on January 12, so we’ll have to see how that plays out as well.
Carol Hurley is a Senior Market Strategist with Lind Plus, Lind-Waldock’s broker-assisted division. You can reach Carol at 866-790-4371 or via email at Churley@lind-waldock.com.
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