As The FOMC Looms

Happy Monday, everyone!

A quick round-up of the markets surely demonstrates we've got some decisions to make as the FOMC looms ahead of us.  E-Mini futures for the S&P at 1421 (negligibly up), the Dow at 12804 (up) and the NASDAQ at 1957 (negligibly down) are all in a bearish trend to open the week.  Corn futures have seen the most robust growth, topping out at 512 in the nearby month after 3 gap-up days, and the beans down today, but up overall at 1296.  Gold finally broke through and stayed above 900 at 903 today after a high of 914, and silver's climbed to a high of 1642.  Crude climbed from its retracement to 94.20, heating oil's up slightly at just under 2.58, and natural gas has continued its bull run to close at 8.353.  The dollar index at 75.70 shows our treasured currency isn't so treasured right now -- but declines for the pound to 1.9515, the euro to 1.4868 and the yen to 0.9288 seem to offer a brief glimmer of hope.

The decisions to be made aren't so much what to do once the Fed drops interest rates, but what to do in anticipation of it.  Right now, prices have all been building in this rate cut, which many analysts are saying will be 50 basis points.  Whether any of us agree that such a cut is necessary or even recommended is a whole other story -- we're here to be profitable in our trades, not right about monetary policy.

e-Minis -- If the last few rate cuts are any indication, the indicies will "suffer" a decline immediately following the rate cuts, but let's be clear:  past performance is not indicative of future results.  Putting on a short position now is certainly premature, and we're not guaranteed prices will fall.  I'm looking to put on a strangle for the e-Mini S&P, Dow or NASDAQ futures, with my put at the money, and a ready finger to leg out of the call.  I'll be taking a risk here, since my bias is bearish, but if it pays off -- great!  I'll be able to gain a lion's share of the price decline, and I'll be keeping a wary eye on what price means "enough is enough"!

Grains -- Unless there's some catastrophically good news that a few million hectares of corn suddenly sprouted harvestable crop, or that somebody came forward saying, "Oops!  Here's all that corn we didn't count in inventory!", I'm staying long corn.  Of course, it would certainly be wise to hedge my position with either a stop-loss (weak) or a put option (strong).  Same thing for beans.

Metals -- Now this is certainly a complex that needs some scrutiny.  Gold's been on an uptrend for quite sometime now, having gained more than 30% over the course of the last 6 months, and doubling in price since early 2005.  I've been long gold, and I'd stay long gold, providing a put option as a stop-loss.  The real danger here is if all those hedgers that have been buying gold to protect other investments suddenly decide that gold's got nowhere to go,and they need the cash.  Quite frankly, we have to reckon with the fact that nobody's pockets are bottomless ... how much can people really spend??  Additionally, how much can they really take before they need liquidity again?  Silver seems to have been benefitting from all the bad news lately, so a long silver position is probably a decent idea, but I'd pick one metal or the other, depending on the type of trader you are and the size of your account.  For those of you thinking copper, a non-precious manufacturer's metal like this is as good as a precious metal for an inflation hedge.

Energy -- What can I say?  It all depends on how big you factor in the decline of the dollar, versus the picture in the Middle East, versus the trouble in Nigeria, versus the slowing demand in Asian markets as ours begin to putter, versus the temperature extremes through the winter, versus the shift to alternative fuels, versus the ... oh, for crying outloud.  Long term, I'm a pessimist -- long crude.  Short term?  A decrease in the dollar will push up prices, but as we edge out of the cold spell, prices should fall again, so short out to June maybe?  Gee, that was reassuring.

Currencies -- The dollar is on its way down.  The question is how far?  It certainly can't go to zero, can it?  If the Fed cuts rates, the dollar's going to dip even further.  I'd certainly think about a long position in pounds or euros, especially given the ECB's and the BCB's reluctance to tamper with rates right now.

Well, that's my Monday afternoon outlook ... Enjoy!  Tomorrow, I'll be revisiting the mortgage crisis ... see you then!