- 1999: Volume 8, No. 1 What's Hot and What's Not

Many basic commodities remained in protracted downtrends due to sluggish demand tied to the weak global economy. The story of the Dow, however, has become "The Bull Market That Would Not Die." Hogs also remained a hot market, finally bottomed after an historic crash. Many other markets stayed in two-sided phases, some due to whip-saw action caused by fund activity.

What's Hot

Stock Market—Even though Federal Reserve and Treasury officials, along with a host of economists, expect a significant U.S. economic slowdown this year, and Fed chairman Greenspan keeps issuing stern warnings that the stock market is over valued, the mutual fund investing public just doesn't seem to care and continued to pour money into the Dow and S&P and NASDAQ. The latest rage is internet stocks which have registered eye-popping gains. Basically, investors aren't bothered by the slower global economy and the latest troubles in Brazil (devaluation and high interest rates there could lead to economic ruin). And why should they-recession in Asia just doesn't appear to be having much impact on the U.S. economy, which continues to hum along at a much stronger than expected pace, so Brazil has been ignored. With regard to trading, the stock market has climbed "the wall of worry" for so long it's impossible to guess what might come along to change the bullish mindset. That means the technicals are likely to give the first indication of a top. Currently, a close below the 1220 low in March S&P would signal that the latest up leg, and perhaps the bull market, is over. Unless that happens, higher prices are favored.

Sugar—In early January the funds, in their infinite wisdom, covered a huge net short position in sugar and turned around to the long side-all in one day-triggering a massive rally, even though the bearish long-term fundamental story of adequate supplies and slower demand due to the weak global economy remained in force. It apparently never dawned on fund managers that their collective action created technical buy signals, not a change in the supply/demand balance. Then this week, in a classic case of "the funds giveth, the funds taketh away," they liquidated longs-all in a two-day period-triggering a sharp decline and a resumption of the major downtrend, and now appear to be going short again.

Coffee—Fund buying in coffee gave way to fund selling and a sharp decline when major uptrend support was violated. Have the fundamentals turned bearish? Not really. It's been no secret that current supplies are ample due to last year's massive Brazilian crop which offset lower production in other areas. But there are solid bullish arguments for the remainder of 1999; Brazil's next crop should be down more than 30 percent from last year due the nadir of the coffee tree production cycle, and Colombia's output is likely to be down due to a La Nina induced drought. Brazil's devaluation is widely expected to result in bigger exports, but Brazil was going to export as much coffee as possible with or without a devaluation. We have a feeling the bullish fundamentals will reassert themselves eventually pushing coffee higher.

Hogs—This market turned on a dime, but not before hitting a 50-year low in the cash market. The December pig crop report showed that producers finally intend to cut back on hog output later this year and prices have been skyrocketing ever since on short covering and fund buying (they're going long) and on the hope that hog marketings have peaked (probably the case). There have also been rumors of further pork donations to Russia (which still won't make a dent in supplies) and talk of stronger exports to Japan (although continued recession there implies otherwise). On the other side of the coin (you knew there had to be one), pork supplies should remain more than ample through at least mid-year based on the pig crop report and huge frozen pork stocks. In addition, although hog producers are still a ways from profitability, the strong rally might cause the big corporate operators to reverse plans to cut output, resulting in continued pig crop expansion, which obviously could keep a lid on prices. We have a feeling the rally will run out of steam soon since prices are approaching major overhead resistance.

Soybeans—Lack of a significant weather threat in South American soybean areas, despite the usual assortment of dry pockets, put the soybean market into a steep downtrend. And even if Argentine and Brazilian production is shaved by dryness caused by La Nina, U.S. supplies should remain burdensome due to sluggish demand. There are also early forecasts for U.S. acreage to rise substantially this spring. The only positive item is technical in that prices are nearing psychological support around 500. However, in years of over supply, this market usually bottoms in the 450-500 area.

Cotton—This is another market stuck in a big downtrend due to slowing demand and adequate supplies. There's been talk that China might not export any more cotton and might even consider some imports since domestic prices reportedly are above world quotes. But until the global economy turns around, which might not occur this year, the best chance for a rally probably comes from fund buying since they might be maxed out on the short side.

Other markets in a similar situation to cotton-ample supplies and slow demand due to the sluggish global economy-are cocoa, copper and the petroleum complex.

What Might Get Hot

T-bonds—T-bonds have made some big moves over the past few months but basically ended up going nowhere due to the mixed fundamentals; on the bull side are global economic concerns heightened by Brazil's recent devaluation; on the bear side is the much stronger than expected U.S. economy. Not surprisingly that combination has led to the conventional wisdom that the Fed will keep interest rates all year. However, as of this writing, the bond chart has a bullish slant, indicating that troubles in Brazil and the potential for problems elsewhere (there's talk China won't be able to avoid devaluation which could trigger another Asian crisis) might be gaining the upper hand setting the stage for another bull move.