Let’s begin with this chart, one you may not have seen.

Monthly Bonds

Commodity.com

This is a longer- term chart of the 30-year Treasury bond futures. The bar to the extreme right on this chart represents April 2006 to date. Note how this month a six-year uptrend line has been violated to the downside. Lower bond prices equal higher long-term interest rates. What does the bond market see?

I believe (despite what the government statistics tell us) the bond market is looking at inflation. Look at a chart of gold or copper, wheat or gasoline. History has proven the bonds can move quite a bit lower than where they are currently trading when inflationary expectations heat up. Many basic commodities are in bull trends. Inflation is heating up (as you’re reminded every time you go to the gas pump)--the bond market seems to sense this. Do you?

Silver

I forgot to mention silver in the previous paragraph. Silver has been on a tear lately, hitting a new 26-year high last week.

May 2006 Silver

Commodity.com

The silver pit is talking $15 as the next stop. Is it? I’m not so sure.

Don’t get me wrong--I’m very bullish silver and we’re currently in a long position because, after all, the trend is up. I do believe $15 silver is in the cards eventually; I’m just not so sure about this being the next stop. A few technical indicators on the chart above are making me a little nervous.

Take a look at RSI (relative strength indicator). The nine-day daily is at an extreme reading; it’s over 90, a number generally seen at tops. There’s no doubt this market is overbought. It could theoretically drop about $2 and just be at the 50-day moving average (the dark green line on the chart). Still, in a mega-bull the RSI can remain overbought for quite awhile.

Open interest, the lower indicator, has been declining on the last rally, and this also can be a negative leading indicator at times.

Bottom line, this is a bull market until it’s not anymore. However the caution flag is out, and we need to be vigilant for any sign of a near-term top and correction.

Corn

This week falls right in the middle of the time frame I’ve targeted to buy new crop (December) corn futures. We’re bullish corn for the following reasons:

• Reduced acreage: US farmers are cutting planted corn acreage this season due to the increase in their costs of production. Fertilizer prices have doubled since 2004. Soybeans don’t require fertilizer because they produce their own nitrogen, and, as a result, the reduced corn acres are going into soybeans.

• New demand source: Corn usage for ethanol is surging and could reach close to the 2 billion bushels exported each year from the US. This new demand source is not going away.

On Friday in Futures Market Forecaster, we purchased half of our ultimate position in December corn futures. The objective is to scale into the other half on weakness if possible, possibly down into the lower 260s, risking to 250 to 255. If no additional weakness is evident by the end of April--a real possibility--it may then be time to establish our full position at that time.

© 2006 George Kleinman
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