Commodity ETF Alert April 2010 Issue

| April 13, 2010 | 0 Comments



It happens every year at this time.  The days start getting longer and temperatures start to rise.

For many parts of the country still caught in winters grip, it seems like a fantasy.

But rest assured, it’s happening…

What actually makes the days get longer and the temperatures rise?  Well, it all has to do with the tilt of the earth’s axis.

You see, we passed through the vernal equinox on March 20th.  This is the day the sun is directly over the equator of the earth.

On the equinox, the day and night are equally long.  The term equinox comes from the Latin terms aequus (equal) and nox (night).

After the vernal (spring) equinox, the amount of daylight grows with each passing day.  The days get longer and the nights get shorter for the northern hemisphere.

At the same time, the temperatures rise because the sun climbs higher in the sky.  The more direct the sunlight overhead, the warmer it gets.

The sun rises to its highest point in the sky for the northern hemisphere on June 21st, the first day of summer.  This day is called the summer solstice and it’s the longest day of the year for the northern hemisphere.

Many people don’t realize that the first day of summer is actually the same day the northern hemisphere starts heading back towards winter!  From June 21st on, the amount of daily sunlight starts getting shorter.  The sun starts its journey towards the southern hemisphere.

Ok, enough with the astronomy lesson.  What does this have to do with us?

It means summer is just around the corner!  And you know what that means…

Time to get in the car and grab a little vacation time!

After one of the longest and most severe recessions in generations, many families are getting cabin fever.  With all the uncertainty in the economy, people have been cutting back on travel and discretionary expenses.

But now it appears the U.S. economy may finally be off life support.  Retail numbers are looking better, unemployment is stabilizing, and GDP is positive again.

The outlook for the consumer is starting to look better.  In recent weeks, we’ve seen a number of airline, hotel, and retail stocks surging higher.  All this points to a resurgence for the consumer.

As the consumer recovers and opens up the wallet, the demand for gasoline grows (especially at this time of year… going into the summer driving season).

We’re betting the consumer will take to the roads this summer…

A lot of families stayed put last summer as uncertainty reigned supreme.  But now the light is starting to show at the end of the tunnel for the economy.  Dad may want to load the family in the car and go on a road trip.

This is a seasonal trade that could be bigger than usual.

It’s no secret, buying gasoline as we head into the summer driving season is a solid trade.  It makes perfect sense.  Buy on the expectation of higher demand and sell as the summer driving season peaks.

But this year the trade could be even bigger.  Here’s why…

You see, during the recent recession, demand for gasoline has been low.  Consumers have been pinched to say the least.  Many have lost jobs or had their income cut.  All this uncertainty led to a cut back on travel.

And don’t think oil refiners haven’t noticed.  They’ve been cutting back on refining for months now.  In fact, the majority of refiners are running at rates well below full capacity.  Some are going so far as to idle their plants (temporarily shut them down).

Gasoline inventories have been relatively high in recent months due to the recession.

But that’s starting to change.  The most recent Energy Information Administration (EIA) numbers showed gasoline inventories are starting to fall.  And that means demand is starting to come back.

Here’s where it gets interesting…

If the summer driving season turns out to be strong, refiners could get caught behind the eight ball.  By running below full capacity, we could see a squeeze in gasoline prices due to lack of short term supply.

Of course, refiners will eventually ramp back up to meet demand, but not before prices for gasoline go higher.

The big money is on our side…

The most recent Commitment of Traders (COT) report shows that large speculators are betting big gasoline prices are about to go higher.  The COT report is a weekly report of producers as well as institutional traders.  The report shows how the smart money is investing.

For the week ending April 6th, there were 78,541 more bets that the price of gasoline would rise instead of fall.  The smart money is betting prices are about to go higher.

The futures market is currently suggesting tight supply for gasoline.  The front month (May) contract for gasoline is trading at $2.29.  The June and July contracts are trading at $2.30 and $2.31 respectively.  This small price premium between the far month and the front month contract means something.

It means supply for gasoline is perceived to be tight.  This condition points towards higher prices for gasoline in the near future.

The bottom line is this…

After a long fight with the recession, the American consumer may splurge and go for a vacation this summer.  Americans are likely to hit the road in the coming months.  With refiners operating well below full capacity, we could see a jump in gasoline prices going into the summer.


United States Gasoline Fund (UGA) is an ETF tracking the price of gasoline.  UGA tracks the price of gasoline through the futures market.  The fund currently holds the May 2010 RB gasoline futures which are trading for $2.29.


Take a look at the chart…


As you can see, UGA has been steadily trending higher for the past year.  As the summer driving season approaches, we may see a short term jump in prices.  UGA is currently pulling back to the $38 minor support zone.  This zone will offer short term support.  The next lower support zone is at the $36 area.


United States Gasoline Fund (UGA) is trading at $37.97.
Buy UGA up to $38.50 per share.
Our profit target is $45.00.
Don’t forget your position sizing.

Commodity Review

Energy JJE $24.73 $24.71   0.1%
Grains JJG $34.82 $36.09 -3.6%
Industrial Metals JJM $43.47 $41.00   6.0%
Precious Metals JJP $61.16 $58.89   3.9%
Softs JJS $43.76 $47.63 -8.1%
Livestock COW $30.15 $29.45   2.4%
All Commodities DJP $40.59 $40.68 -0.2%


Crude oil is on fire again…

Short to medium term fundamentals for oil are slightly bearish, but it doesn’t matter. The oil trade is back as investors are feeling the economy is stabilizing.  A growing economy requires more energy.

Global demand for oil is rising as emerging economies become more developed and start requiring more energy.  We see this in China and India.

Unless something derails the global economic recovery, we should see oil prices above $100 a barrel in late summer of 2010.

Natural gas, on the other hand, remains weak as the market is very well supplied.  New technology in natural gas drilling has brought ample amounts of new supply to the markets.


The Planting Intentions report from the USDA came out recently.  The report was not nearly as bullish as we needed for grain prices to jump.  But don’t worry!

We’re going to stay in JJG.  Prices for soybeans, corn, and wheat are all at or near the bottom of their 52-week trading ranges.  Prices shouldn’t go drastically lower from here.

If prices for these grains go substantially lower, farmers simply won’t plant.  The cost/ benefit of planting a crop won’t add up.  Input costs like diesel fuel are going up while their product price (grains) is falling.

Also, as the spring planting season gets under way, investors will be watching the weather.  Any weather disrupting the planting season will put a bid under grain prices.


Industrial metals are soaring as the perceived strength of global economies is gaining steam.  Copper, nickel, and aluminum are all at or near 52-week highs.  We would love to jump in on the game but feel these commodities are all slightly overbought.

Let’s wait for a pullback to more reasonable levels before we jump back in this space.


Precious metals are on a tear again!  Gold, silver, and palladium are all showing large gains over the past two weeks.  This could be the start of a new uptrend for precious metals as investors around the world are looking to diversify their assets out of global currencies.

We’re also looking at new fears in the European Union as Greece is back on the ropes.
But Greece isn’t the only one… the balance sheets for many countries are very unstable, including the U.S.

Should interest rates rise substantially for any of these countries, the fear will grow quickly.  Higher interest rates lead to higher borrowing costs for countries, which only increases deficits.  The larger deficits get relative to GDP, the more precious metals will become a safe haven.

We’ll keep riding this trend for quite awhile as we still see precious metals under-valued.


Cocoa and sugar are getting taken out to the woodshed in recent months.  Both commodities have been in screaming bull markets since the end of 2008.  But the bubble may have popped recently in these commodities.  Prices have fallen around
17% for the JJS Soft’s total return sub-index in the last two and a half months.

We’re looking for further price declines in both commodities in the near future.  At some point, we may step in and pick these up at a support level.


The number of cattle in feedlots is at its lowest point since 2003.  This means the supply of cattle going into summer is lower than many were estimating.  This is putting a bid under live and feeder cattle.

This rise in price is good for producers (cattle ranchers).  The price of cattle has been abnormally low over the past two years due to the recession.  The low prices have cut into profit margins for many small ranchers.

Portfolio Changes

  • This month we’re adding Gasoline (UGA) to the portfolio.  See above for all the details.

Category: Commodity Trading

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.