Your odds of success increase when you trade with the longer-term trend. Studying fundamental analysis can help you understand the longer-term trend and react accordingly.

- Donna Heidkamp

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COMPLIMENTARY Weekly ProTrader Newsletter

October 26, 2007

Learn About Fundamental Analysis with a COMPLIMENTARY Intro Guide from RJOFutures

RJOFutures’ Intro to Fundamental Analysis Guide provides information on which related economic, financial, and other qualitative and quantitative factors can be used to evaluate commodities in the agricultural, softs, metals, and energies markets. It provides information that can help traders use fundamental analysis in comparing current prices -- in hopes of determining what trading position to take.

Get Yours Today!

Over the past couple of weeks, continued signs of a troubled economy seem to be all over the market. Housing reports continue to come out weaker than expected. The housing starts are at 1.191 million units versus 1.285 million units expected. According to Dennis Gartman, editor of The Gartman Letter, past housing recessions have always continued to decline until housing starts were below 1.00 million units. It would not be surprising to see new housing starts below .800 million units before bottoming out. The existing home sales came out below expectations at 5.04 versus 5.25 million units. New home sales came out at 770,000 units sold versus 775,000 units expected. The August new home sales also were revised lower -- to 735,000 units sold versus 795,000 previously. 

The weakness in housing is attributed to the recent jump in weekly jobless claims, as it continues to pressure all sectors of the market. Jobless claims came out at +331,000 this week versus +337,000 expected. The four week average has increased to 325,000 jobless claims. Due to sub-prime lending issues, the Bank of America also announced that it would be cutting 3,000 jobs. This is likely the beginning of more job cuts in the financial world. The trend in higher jobless claims is increasing the likelihood of a Fed rate cut on October 31st. For more information on economic indicators, we at RJOFutures’ have recently written a new Intro to Fundamental Analysis Guide, which you can request for no charge.

At the moment, the Fed continues to be more concerned with growth in the economy rather than inflation. We continue to keep an eye on the inflation posture as a result of high and rising energy and food costs. Producer Price Index (PPI) and Consumer Price Index (CPI) both came out higher than expected recently. PPI came out at +1.1% versus +.5%. PPI, excluding food and energy, was at .1% versus .2%. Producers appear to be starting to pass on cost increases to consumers, to protect their bottom line. CPI increased .3% versus .2% as expected. If you ask anyone on the street, we all agree that the cost of day-to-day goods and services are significantly increasing in price with the exception of housing prices. In theory, a weak dollar exacerbates inflation. This is because many commodities, such as crude oil and gold, are heavily traded in the world market in terms of the U.S. dollar -- making them more expensive. Sellers of crude oil are only willing to sell crude on their terms and price. Since crude oil production takes place all over the world, the U.S. is at a disadvantage in this case. This type of inflation causes the U.S. to be at risk of a slowdown in the economy, due to a lower purchasing power.

Even though inflation is increasing, consumers continue to shop, which is curtailing some of the markets’ immediate concern of inflation. The retail sales figures for September came out higher than expected at +.6% versus +.2% expected. Business inventories also came out lower than expected, at +.1% versus +.3%. The biggest area of concern in the retail sector appears to be big box shopping. According to the weekly chain store sales report, sales were down 1.5% versus up 1% previously. As a result of the weaker housing numbers, it is no surprise to see durable goods orders lower as well. Durable goods orders came out down 1.7% versus an expected increase of up 1.5%. The August durable goods orders were also revised lower -- to down 5.3% versus 4.9% lower. 

Although the recent drop in the stock market (attributed to several lower earnings reports released recently) has rattled consumer confidence, the stock market remains in a long-term bullish trend. The stock market continues to rebound off of the expectation that the Fed will continue to cut interest rates. The rate cuts may provide temporary relief to the economy and most notably the stock market. However, it is questionable as to how it will effect the market longer term. The more aggressive rate cuts are not indicative of a healthy economy.

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Fed Watch:
The upcoming FOMC meeting announcement is scheduled for October 31st. The market is expecting the Fed to lower rates with a bias toward a 25 basis point rate cut due to the continued housing weakness and slowing economy. An increasing percentage of people are expecting a 50 basis point rate cut. It is also rumored that the Fed will lower the discount rate as well yet again.

Risk Management:
As the market continues to become more and more volatile and filled with uncertainty, the futures and options markets are commonly used to hedge current portfolios to reduce overall exposure. To further track market trends for making educated hedge or speculative decisions, it also is helpful to have a good handle on fundamental analysis (as well as technical analysis). Contact RJOFutures to get your complimentary intro guides for a better understanding of both types of analysis.

Technical Update:
Near Term Trend: Higher
Long Term Trend: Higher
Support: 109-25.5 (Key Pivot), 108-03.5
Resistance: 110-31.0 – 111-01.5; 116-05.0
If the Fed cuts rates as expected, it could trigger new buying in the Ten-Year note market. If so, the major upside target points to 116-00.0 in the TY note, with a rate near 4% down the road. The interest rate markets are at extremely critical levels.

If you cannot view the Ten-Year Note chart, go here.

Upcoming Key Reports:
10/30/07 -- Consumer Confidence - 9:00 am CST
            FOMC - Day 1
10/31/07 -- Employment Cost Index - 7:30 am CST
            GDP 3Q - 7:30 am CST
            Construction Spending - 9:00 am CST
            API/EIA Energy Stocks - 9:30 am CST
            FOMC Meeting -- 1:15 pm CST announcement
11/1/07 -- Weekly Jobless Claims - 9:00 am CST
            Personal Income - 7:30 am CST
            ISM Manufacturing Index - 9:00 am CST
            EIA Gas Storage - 9:30 am CST
11/2/07 -- Monthly Unemployment – 7:30 am CST
            Factory Orders – 9:00 am CST

The risk of loss in trading commodity futures and options can be substantial. Before trading, you should carefully consider your financial position to determine if futures trading is appropriate. When trading futures and/or options, it is possible to lose more than the full value of your account. All funds committed should be risk capital. Past performance is not necessarily indicative of future results.

Donna Heidkamp is a Senior Trading Advisor at RJOFutures. Her interest in the futures industry stems from strong family ties to production agriculture in Hereford, Texas. After completing a bachelor's degree in Agricultural Economics at Texas Tech University in 1995, Donna moved to Chicago to participate in the Chicago Mercantile Exchange Agricultural Broker Training Program. The program exposed her to all facets of the futures industry, enabling her to work with experienced floor traders and develop a strong understanding of the intricacies of trading in the futures markets. 

Since completing the training program in 1995, Donna has continued to gain a well-rounded knowledge of the industry by working as an order clerk, trading desk manager, and broker for RJOFutures. In 2004, she started a branch office of RJOFutures to focus my efforts on helping clients meet their trading goals. By identifying client objectives, managing risk, and providing a carefully tailored service, Donna serves as a dedicated liaison on all trading floors to full-service, broker assist, and on-line clients. Donna’s commentary can also be heard regularly on CNBC TV and Bloomberg.

In order to continue to better serve my customers in an ever-evolving and dynamic industry, she also completed a M.S. degree in Financial Markets and Trading from the Illinois Institute of Technology in May of 1999.

RJOFutures is the retail division of R.J. O'Brien, one of the oldest FCMs tracing its history back to 1914.

Learn About Fundamental Analysis with a COMPLIMENTARY Intro Guide from RJOFutures

RJOFutures’ Intro to Fundamental Analysis Guide provides information on which related economic, financial, and other qualitative and quantitative factors can be used to evaluate commodities in the agricultural, softs, metals, and energies markets. It provides information that can help traders use fundamental analysis in comparing current prices -- in hopes of determining what trading position to take.

Get Yours Today!