Commodity Crunch Shalacking...

Never have we experienced so much emotion like the last 7 or 8 trading days.   In another week or so, we may as well merge our market with Hang Seng or Bombay exchange!.    The volatility with our market makes us wonder if our market is just another emerging market.    Of course, every day there's always something you can point your finger to and say "that's the reason that took us down(or up)".  It might as well be the Beirut Exchange with almost daily bombs knocking out either the Bulls or Bears!

Today was the commodity crunch and a huge unwinding out of the blue.   There's no doubt about it,  if it wasn't for the fact the commodity crowd are all trying to exit the door at the same time, led by the hedgies, we may not look that bad given Tuesday inspiring up move.     Right now, you simply feel disgusted!   It seems like this was all orchestrated to happen the day after FED.  Today's action just isn't good for either the bulls nor bears.    For bears, a lot of them covered Tuesday thinking a short term bottom was made and a crisis relief rally may be at hand.    Bears should be upset about the quick turn of events today because not only they felt like they covered too early, it's also difficult if not pointless to establish new position today.     For bulls, today's action is nothing short of heartbreaking as any long positions you established yesterday or earlier today would've been beaten bad by the end of day.     This is one tough and mean and ugly market.  

So what happened to the commodity prices?    Apparently, the recent popular trade to long all of the commodity just got too crowded.    When it's apparent that Fed is ready to take action against inflation by cutting 75 basis pt as oppose to 100 and also the announcement of rescue solution to our recent liquidity crisis, some institutions are not hesitant to lock up profit and clear out their momentum oriented commodity position.      These days, information travels fast and it just doesn't take a genius to notice some hedgies-institutions were selling big.  Then it's just a matter of one thing leads to another and all of a sudden everybody is booting out their positions, including the frightened retail trader, in whole or partially.  Here's the explanation heard most from the trading floor, ..."today's sell-off in commodities, suggesting it is the result of de-leveraging. Says following BSC's implosion, other prime-brokers (those that clear for and service hedge funds) may have gone around and called for de-leveraging at the funds. Notes this was equivalent of a margin call at the funds, triggering the selling. Says hedge fund world may look to replace the brokerages next."

What about the rest of the market?   Two words, "collateral damage"!    We know that this market is full of leverage and when one crowded sector gets dumped big, everybody feels the pinch and start to clear positions to make room.     Institutions need to sell stuff to make room for cash in case of further decline or if their large  "good" positions dropped so much that they are in danger of a margin call.     When things go bad, big leverage means big liquidation.

Tomorrow is an option expiration day for March and it won't be a quiet day.    In our opinion, if you believe that the commodity market is NOT finished like we do, there'd be some great opportunities in the next couple of days, including yesterday if you had the guts to enter late.    The key here, is to go gradual with the purchase.    We are planning to buy back some of the positions over the next two to three days.     For example, if we decide to buy just 500 shares in a position, we'd use 5 different orders of 100 share each and spread the order over two to three days.    That way, we know that we won't get the absolute best price but we won't get a worst price either.      This is to assume that the commodity market doesn't go into a real free fall.    If after next couple of days and the price continues to fall, we'd set a stop price and let it play out.     The risk/reward here favours a long trade in the commodity related plays.    As long as we spread out the orders over a period of two to three days, we'd have plenty of time to prepare and react in case things point to more than a mere correction. 

Today was anomaly of sorts, it is not every day Gold falls 69 buckeroos (6.5%), Oil tumbling 4.5%, CRB index 4.1% and a strengthening $.   It was a surprise, well more like a shock considering the timing following the FED.  If it wasn't forced selling by hedge funds looking to deleverge in order to meet margin calls, but just rumors leading to such then we can expect a fight back.  Either way, truth or rumor, it's disgusting and us the little guys are just pawns in their game.