Goldman Sachs (GS) Reverses Tune on Excellent mid-April Bearish Call on Commodities

Wednesday, May 25th, 2011

by Trader Mark, Fund My Mutual Fund

Love ‘em or hate ‘em, Goldman Sachs (GS) is widely followed on Wall Street, so when they talk, people (at minimum) pay attention.  About 6 weeks ago Goldman turned bearish near term on their recommended basket of commodities [Apr 12, 2011:  Goldman Sachs Turns Near Term Bearish on Their Recommended Basket of Commodities]  Three weeks later, the implosion of the commodity market began, as margin requirement hikes in silver led the way for the broader group.  That’s pretty darn good timing, considering the group had been in a bull market of incredible strength since late August 2010.

Here is a look at how the group has done over the past month – you can see outside of orange juice and rice, there has not been many places to hide.  (note that gold has held in relatively well)

[click to enlarge]

This morning, Goldman is getting back on the bullish bandwagon.  This is pushing up commodities in the premarket as lemming pile in.  We’ll see if Goldman can go 2 for 2 on these calls in the next few months.

• Goldman Sachs suggested buying oil, copper and zinc, reversing last month’s call to sell commodities.  “The risk/reward once again favors being long commodities,” Jeffrey Currie, head of commodities research at Goldman Sachs in London, wrote in an e-mailed report today. “Economic growth will likely be sufficient to tighten key supply-constrained markets in the second half, leading to higher prices.”

Via FT.com Alphaville:

We remain structurally bullish commodities
Although we remain structurally bullish and have long argued the structural case for being long, timing does remain critical. This was evident in the recent market correction, which brought commodities down roughly 10% from their April highs. With prices now more in line with near-term fundamentals and price targets, we believe that the risk/reward once again favours being long commodities. Although the economy has likely shifted into a slower, but sustained, growth environment, we continue to expect that economic growth will likely be sufficient to tighten key supply constrained markets in 2H2011, leading to higher prices from current levels.

Raising oil price targets on persistent impacts from MENA events
We expect that the ongoing loss of Libyan crude oil production and disappointing Non-OPEC production will continue to tighten the oil market to critical levels in early 2012, with rising industry cost pressures likely to be felt this year. We are now embedding in our forecasts that Libyan production losses will lead to the effective exhaustion of OPEC spare capacity by early 2012. This raises our year-end Brent crude oil price forecast to $120/bbl from $105/bbl, our 12-month forecast to $130/bbl from $107/bbl and our end-2012 forecast to $140/bbl from $120/bbl.

Mid-cycle pause nearing a trough, creating upside to metal prices
While a sharp decline in world economic growth remains a downside risk to commodity prices, we see the current slowdown in economic growth as part of a normal mid-cycle pause, partially driven by higher commodity prices, and therefore not a reason to expect commodity prices to decline substantially. Further, we believe that the recent evidence of economic weakness represents signs of a slowdown and not a downturn, which is reinforced by signs that Chinese metal demand has already returned with the SHFE-LME copper arb opening again, exchange inventories declining and the Shanghai copper forward curve moving into backwardation.

Copyright © Trader Mark, Fund My Mutual Fund

Tags: Alphaville, Bandwagon, Commodities Research, Commodity Market, Copper, Crude Oil, Currie, Economic Growth, Goldman Sachs, Implosion, Late August, Margin Requirement, Mutual Fund, Orange Juice, Pay Attention, Premarket, Price Targets, Risk Reward, Sachs Gs, Wall Street, Zinc
Posted in Markets, Oil and Gas | Comments Off

An Opening for the Bears?

Thursday, February 24th, 2011

by Trader Mark, Fund My Mutual Fund

I have long said this is the unshortable market.  The strength has been so unyielding, even breaking the 13 day moving average (not to mention something more serious) was impossible.  In a normal market, the falling to the 20 day moving average is very normal, even in an uptrend.  But those moments have been extremely rare the past 6 months.   What I was looking for a month ago when the market broke down due to Egypt was a fall through the 20 day moving average – that did happen, and the market closed on the lows of the day (and week).  In normal times that is a very bad development for the technical structure of the market.  But I was wary.  Why?  Because it happened on a Friday, and since March 2009 almost all gains have come on (a) premarket surges Monday morning or (b) the first day of the month.  And after the Friday Egypt was roiled came Monday + the first day of the month (Tuesday).  Like clockwork the market gapped up Monday and was at yearly highs by Tuesday.  So much for the technical condition.

This time around, Monday is still a few days away, as is the first day of the month.  So the bears might have a small window of opportunity.  Now neither of these days should really mean anything but the psychological impact of seeing those type of days always work for the bulls, feeds on itself.  What would be truly striking would be a poor Monday premarket and/or a poor first day of the month – talk about a change in character.

Yesterday I said I’d like to see the 20 day moving average pierced, and then to close below it another day or two.  Thus far today in the early going, the bears finally have some mojo.  Of course the close is more important than intraday so we’ll see what happens at 4 PM, but for the first time since November shorts actually have a level to play against.  Once can short the index versus the 20 day moving average – if a burst of buying occurs the trade is over, and back to the unshortable market we go.  But at least there is some downside opportunity now and perhaps a move to the 50 day moving average on the S&P 500  (1286).  That would still be a shallow correction if it happened versus last Friday’s highs, but at least a bone for the long suffering bears.

One thing to note – EVERYONE thinks this dip is a buying opportunity.  In normal times, that would have be thinking it is not going to be so neat and easy.  A nice 3-5% dip that can be bought, and we can all live happily after.  The market *should* be messing with as many people as possible, so a nice cute short lived correction should not be what happens.  But this has not been a normal market in a long time.   Just in case there is any inkling of normalcy, a few out of the money puts 4-5 months out, would be an interesting insurance policy that could play out if we get something more serious – such as a break of the 50 day moving average, that really shakes some confidence.

Copyright (c) Trader Mark, Fund My Mutual Fund

Tags: Bears, Bulls, Burst, Egypt, Few Days, Intraday, Lows, Mojo, Monday Morning, Mutual Fund, oil, Premarket, Psychological Impact, Technical Structure, Uptrend, Window Of Opportunity
Posted in Energy & Natural Resources, Markets, Oil and Gas | Comments Off