The Smartest Trader In the Room

Surprise! Surprise! US economic quarterly growth slowed to 2.4%. If that news was not bad enough the US government also released three year economic data yesterday showing the recession was much worse than previously reported. Not the kind of input that would inspire energy bulls, yet the market took the news in stride with all components of the energy complex closing higher.

Equity investors also paid little attention to the rearward looking data. July turned out to be the be best month of the year for equity investors.

Bond traders, however, are a bit more hesitant to jump on the better future ahead band wagon. Bonds are still ridiculously expensive, with the 2 year hitting historically low percentage yields.

So who is the smart guy in the room? Perhaps they all are. Short term bond yields have an anchor courtesy of the Fed's low to no interest rate target. Still deftly afraid of deflating hard assets and poor job creation.

Equity traders get the fact that the US consumer are currently retrenched, but are looking ahead to continued world wide growth driving large cap stocks, which will eventually lead to these companies hiring more to meet growing product demand.

Energy traders are seeing increased crude imports and higher refinery run rates in China, giving them confidence demand will continue to eat away at record supply levels. US gas demand has risen to pre-recession levels, also contributing to bullish bets on refined product futures.

We are living in a unique era that has little precedence to base historical trading pattern ideas. Each sector is trading on its own fundamentals. Being a smart trader mean focusing on your sector and not trying to correlate trading positions with other sector traders.

Potential Gulf Port Shipping Lane Delays

So far the Gulf oil spill has not had a major effect on Gulf port shipping lanes. A complete closure of the shipping lanes is unlikely, but would be disastrous for the price of all commodities being shipped into the United States.

Any ships encountering crude on their hulls will need to be delayed as the hulls are power washed to eliminate oil entering the Mississippi River. The more ships that encounter oil flows will make the delays longer.

The Gulf states were fortunate that tropical storm Bonnie was unable to generate hurricane strength winds. However, the winds are still strong enough to direct remnants of the spill into the shipping channels.

Traders should tune to Coast Guard reports for any indication that shipping delays are occurring due to crude entering navigation channels.

Technical Selling Keeping Crude Below $80

May crude futures looked to be on a relentless climb to $90. A few of the large trading houses were setting sites on $100 crude. It peaked, however, at $84 in May and has not seen the $80 handle at all in June or July. Technical traders enjoy these trading resistance levels as it makes it easy to place trading on auto-pilot, allowing computer programmed algorithms to dictate buy and sell decisions.

The same technically driven trading strategies were a big reason for yesterday's large sell off in US equities. The DOW industrial average could not penetrate 10,400 resistance, triggering automatic sell signals driving stocks down over 250 points.

Traders will continue repeating the same strategy of selling resistance levels and buying support until some major fundamental event creates incentive to push through monthly trading ranges.

A few of the fundamental events to keep and eye on that would have the power to drive crude back onto the $80 handle are: a major hurricane striking off shore Gulf oil rigs, much better than expected quarterly earnings from large US corporations with strong forward earning guidance, the euro climbing above major resistance at 1.32, or the Baltic Dry Index climbing above 3,300.

Sittin' on the Dock of the Bay Watching a Baltic Supra Panamax Roll Away

An excellent gauge of the strength of the world economy is the amount of iron ore being consumed. The reason is simple. Iron ore is a key ingredient in steel production. The amount of steel being produced is directly correlated to long term capital expenditures, which drives economic growth.

Tracking iron ore consumption has been a passion for several commodities traders for many years, as a sure fire tell-tale of world economic strength. It is most easily done by following a bulk goods shipping lease freight rate indicator, the Baltic Dry Index (BDI).

The main product of bulk dry good shipping is iron ore. When economies are expanding iron ore shipments will be on the increase as steel production rises. When economies are slowing down demand for steel slows and consequently demand for its main ingredient, iron ore, will slow down as well.

Traders keying off the BDI were able to exit long energy futures trades profitably at the end of 2007 and beginning of 2008, as the BDI peaked and began falling. The BDI then gave the OK signal to go long in March and April of 2008 as the BDI support levels held and began rising in the midst of the global recession.

In the past month the BDI has fallen 4,000 points. Energy traders observing this, sold out of long positions fearing growth in China was slowing dramatically. On Friday the BDI closed at 1,940. Well below its 200 day moving average of 3,125.

One factor weighing on recently depressed shipping rates is the number of new Supra Panamex ships entering the dry goods fleet. Traders, however, will be even more confident of the BDI's ability to gauge whether world economies are improving or stagnating. The added fleet supply will give resistance to the BDI's ability to rise above its 200 day moving average. Should it climb back above 3,125, be careful not to be sitting on short strategy crude, heating oil or gas futures.