Best Ways to Maximize Increased Market Volatility

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Throughout the markets, one prevailing truth seems to be evident: inflation. Many traders have let inflation become the thorn in their sides as markets with little positive fundamental news continue to drive higher on the coat-tails of inflation and an over exuberant buying frenzy. Some markets have gotten plenty of press that all traders have noticed, such as grains and energies. Even those who don't watch the markets have felt the pinch. My own natural gas bill from our friends at Excelon went from $150 to $450 and that's real inflation. It's an increase in price that has an effect on the regular consumer not just big business. For the first time in years we are experiencing true increases in our cost of living.

Natural Gas

If you cannot view the Natural Gas Chart, go here.

CCI

If you cannot view the CCI Chart, go here.

Roughly, corn is up over $2.25 per bushel, gold is up $300 per ounce and crude is up $30 per barrel from August pricing. The CCI, or CRB for us old folks, has gone from 410 to 570 showing the overall increase in commodity pricing. So if someone wanted to jump on the inflation band wagon, where would you look? The CCI futures contract which measures the pricing of 17 commodities is certainly one way, but for the more aggressive looking for undervalued commodities may be another.

Grain markets have been marching higher for some time now and as we see in many markets, there are good points to every bad market and visa versa. A few seasons back the wheat markets started to climb on dropping world stock levels, partially caused by drought conditions in a few areas of the world. That combined with the slumping dollar has increased US exports in everything from wheat to coal. Ethanol production is at all time highs increasing demand for corn and depleting stock levels.

Energy price increases are certainly no surprise and although the initial climb in energy pricing may have been politically triggered, OPEC seems quite comfortable with current crude oil pricing. With current supply and demand levels this is a blatant example of price fixing.

Precious metals have skyrocketed to staggering levels not because we have found a new use for precious metals but as a simple hedge against a slumping greenback. Not exactly the best argument to buy a product that really has very little use but old habits die hard.

On the flip side, orange juice futures have barely budged in the same time frame as weather conditions and crops have been optimal. OJ futures have moved from about 120 to 126 and current fundamentals look for this market to still test the 117-120 zone. Meat markets have dropped across the board. Hogs have dropped considerably from 70 to 57 and the April vs. June spreads are awfully attractive. Live cattle is around the same price we saw in August and lumber is down from 270 to 210. With weak construction figures expected to continue we'll some other contributing factor to give lumber a boost such as another tariff dispute with Canada.

OJ

If you cannot view the OJ Chart, go here.

Hogs

If you cannot view the Hogs Chart, go here.

So there are certainly a couple sectors remaining where inflation has not been the story. Buying opportunities? Possibly. The week to week fundamentals in these areas certainly change faster than the overall inflation picture so many of these may be ripe for the picking or at least be worth watching much closer and waiting for positive fundamental influences.

Will inflation continue? The answer to that comes down to whether or not you believe we will continue to see interest rates dropped in the US. Additional rate cuts will decrease the dollars value therefore making it more expensive for us to purchase services and products on the world market and since we are a nation of consumers there is a very good chance we will continue to see prices climbing until the Fed and the US dollar get a handle on this wave of 'the invisible hand'.

To take advantage of markets that are already clearly climbing bull spreads will continue to rise in popularity. Bull spreading (buying contracts closer to current time and selling deferred months) has also been a contributing factor to the increase in market volatility and has caused some traditional markets to go inverted. The increase in open interest and roll-over process has given us unprecedented trading ranges and in turn, an increase in margin requirements making it difficult for some traders to stay in the game for some markets -- most notably, wheat which initial margin has climbed from $975 per contract in Minneapolis and $2025 in Chicago to as much as $7500 and $4500.

All markets are elastic and as prices rise we should hit a point where demand begins to decline. Currently, that's the catch. Demand in many of these markets has not diminished and as long as the dollar drops exports will rise, increasing prices domestically. So how do we fix the problem and do we want to? Until consumer spending slows down, which it will, there's no point to implement a possible fix. We are at the early stages of complaining to our politicians about the price of food or heating our homes but as soon as there is more evidence of a slowdown in spending the trend will probably not adjust course. Stabilization will occur at the point that the Fed stops lowering rates and limits their interference. Until then, the trend is your friend and we might as well jump on the band wagon.

Technology at it's BEST!

The perfect execution platform for the electronic futures trader looking for SPEED and RELIABILITY. Arc Capital Management is an Independent Introducing Broker providing institutional clients, professional traders and financial investors with the means to help you achieve your goals. Try our Complimentary Platform Demo.