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June 14, 2005

Sell Copper - Buy September Puts

After a several weeks of moving almost straight up into new highs (blow off?) the most active July Copper contract was basically sideways last week and has started this week by dropping 3.6 cents on Monday and Tuesday....Chile is by far the world's largest Copper producer, and interestingly, last night's magnitude 7.9 earthquake in the heart of Chile's Copper producing region did virtually nothing to push copper prices higher overnight. Generally, when you have a "roaring" bull market going and there is some threat (whether real or only perceived) to the supply side, there is usually some sort of quite bullish response in the market...That Copper's response was virtually nil leads me to believe that this market is "overloaded" on the upside and is now ready to fall....In other words, everybody who is going to buy it already has done so....

I continue to see Copper as a major shorting opportunity and start each day wondering if this is where it starts down from. Obviously I do not know when this will occur, but my experience and instincts tell me to establish the position NOW....At the top of many bull markets, the look and feel of that market is, "looks like a rocket!", and the case is presently no different in Copper. Much note is being made of how low inventories are on the various exchanges and how China is gobbling it all up (like they were saying at $58 dollar Crude Oil in April before it dropped $13)....I may be dead wrong, but I have yet to see a commodity futures market that goes up forever, and per the long term chart shown below, Copper is no exception....As I have noted before, in Copper, when it's over, it tends to REALLY be over and 30 to 50 cent "crashes" have been the norm.

Every situation in the markets is different and here is my trading perspective/approach in this case:

1. As Copper will most likely start down out of the blue, if history is any guide, it can easily be down the first 10-15 cents in a matter of days (see chart examples below). If you are not there BEFORE it starts, aside from perhaps missing 25% to 30% of the move, you will not know where to then make your entry, i.e, do you wait for a bounce, or,  just dive in and sell it after it has just dropped 10 cents in the past two days?....You need to be there before it starts.

2. Tops tend to be volatile and can just wear you out...I initiated my first positions two months ago and when it immediately broke 15 cents was pretty sure I had it made...Then it came back up and made new highs....This can be discouraging but at the same time, I know that the "bet" has not changed...Copper is still at historical highs, is still the only major market that has not been through some degree of protracted sell off in the past few years and is still pretty much where it has been for months now...I remain convinced it is due to fall off a cliff and all I need to do is make sure I am still there when it happens...This is where I really appreciate the Put Option as a vehicle as it allows me to spend the money for the option and then just wait....If the market goes higher, the option will lose value, but it the turn seriously comes before the option expires, with the way Copper has tended to fall from these levels in the past, any lost ground can be quickly made up.

3. Although I do not expect it, it is certainly possible copper can trade even higher still. If it does, it is my intention to continue buying puts every 10-15 cents higher that it moves....I am not being stubborn about the idea, but simply am prepared for the possibility....I don't, for example, want to see Copper at $1.75 and crawl under my desk in fear....Having seen hundreds of market tops the past 25 years, my experience is a situation like this one will end just as it has done over and over during the past 30 years...Most markets tend to go down far faster than they go up and I don't think this will be any exception...

4. I am selling futures and/or buying puts in the September contract. I think the chances are quite slim, but if Copper continues sideways, goes higher, or in general does nothing positive for me before the September options expire, I will maintain the position by buying more time using the December contract...In other words, I am staying short Copper until it does turn.....The bigger they are, the harder they fall, is a very real concept in the futures markets. This is not to say Copper can't stay up here, or higher, for so long that I begin to look like the biggest idiot who has ever traded, but I'll take my chances....This is not a commodity lacking in production capacity and I strongly believe, at some time in the not too distant future, it will just "come unglued".

If you think this idea makes any sense at all, DO call me tomorrow. I may be dead wrong, but I think this thing is finally ready....And as I keep pointing out, I believe it is important to be there BEFORE it gets started.

If you want a look at Copper tops in the past, click her to go to our April 12th newsletter:


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Buy December Corn & November Soybeans

Corn and Soybeans are both still having weather problems in the Midwest. Soybeans made new highs today and are up about 50 cents from our original entry on May 25th. Corn is exactly where it was when we recommended buying it May 27th but has rallied roughly 10 cents during the last few days after dropping about the same amount last week. I have no idea what the Midwest's weather is going to be for the next 30-45 days and therefore really cannot predict what is going to happen in these two markets. I only know that when these markets indicate weather is potentially reducing production, you don't ask questions. You just get in, define your risk, and let it ride. Soybeans may go up a dollar, or two or three or four ($1.00 = $5000.00 per futures contract)....or they may quit tomorrow and go right back down to where they were three months ago....As I said in my last newsletter, a drought in the Midwest and what it can do to Corn and Soybeans is just about the biggest, fastest thing that ever happens in the futures markets....If it's happening, I want to be there....I am still buying futures, with puts as defense, in both of them.

For examples of several drought related moves (1983 &1988) and longer term charts of how big these markets can move, click here to see our June 3rd newsletter.

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Buy the Dollar Index

The Dollar moved into new recent highs today and I continue to expect to see it trade much higher....Being the biggest markets in the world (billions of $'s, Yen, Swiss Francs, Euros etc. are traded every day), the currencies can sometimes make dumbfoundingly protracted moves....Meaning, they make a decent move and you think, "That should be it", only to later realize the market wasn't even a third of the way to where it was heading....I believe this is the case with the Dollar which is now up about 8 points from where we first recommended it...We are still buyers using a unit of 2 calls to every put...

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A brief Treasury Bond comment

Treasury Bonds have been in a minor "swoon" for the past week and I am happy to have exited all our long positions on May 25th(and gotten a little short with some of you). I'm not sure if this sell off is the beginning of something big, but will say, longer term (or maybe even shorter term) I still expect to see Bonds make substantially new highs again...For the time being though, nothing else to say there....I am currently only "trading" Bonds on a near term basis.

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GIVE ME A CALL.....There's a lot going on right now....


Bill Rhyne



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