RE: commodities surge again!

In reply to an email question:

You may not like my answer to this, but I feel an obligation to my integrity to be truthful. I hope this isn't too professorial to be useful.

I don't predict the future, despite that I trade it! That probably sounds contradictory, but its not really. I keep telling myself that predicting the future is for prophets, not profits! That may sound simplistic, but its also true.

Here's why:
I have found that when I form an opinion -- a market bias, if you will -- in my mind, I then become vested in that opinion or forecast. I then tend to see only the data points that support that bias. It thereby blinds me somewhat to evolving market developments. I then make capital investments that are based upon my OPINION, rather than my ANALYSIS. Because I trade solely on technical analysis, I must always try to separate my OPINION or bias from my ANALYSIS. They are often in conflict with each other. My analysis is almost always more accurate than my opinions, biases, and "forecasts". I am therefore constantly striving to act on my analysis rather than my opinion.

Making predictions and acting on those predictions often gets in the way of my best trading. It is very difficult for me to brush aside my biases and opinions, but it is necessary for me to be an effective trader because the best trades usually come at an inflection point where my opinion/bias hasn't caught up with the shift in market sentiment yet. It takes a lot of GUTS to act against my bias in favor of my analysis!

That said, IF you were to ask me if I have any reason, based upon my ANALYSIS, to believe that the current trend higher in commodities is coming to an end, my technical analysis suggests that the answer is NO! But that could all change tomorrow. Here are what I watch as potential risks to that current trend:

1) biggest risk -- a collapse in the stock market related to an economic collapse. Bad economic news can always send commodities tumbling if the perception of a change/drop in demand alters the economic climate. Tyler Durden is right -- correlation is very high, and the more liquid commodities tend to move harmoniously with stocks
2) change in supply/demand for individual commodities -- dry weather in Argentina is buoying grains, but some rain might change this. But that wouldn't affect commodities as a class now, would it?
3) change in Fed monetary policy -- not much chance of that, is there? But if inflation started to show signs of getting out of control (as my BIAS says it likely will by summer), the Fed might be FORCED to raise interest rates. I can't see Bernanke EVER pulling his head out and awakening to this reality, can you? But eventually, he will be FORCED to by the data!
4) commodity prices push us back into the double dip scenario -- this is a very LIKELY scenario, in my opinion. Crude oil reached another 2010 high today, and the high cost of crude is one of the greatest threats to continued improvement because it is a burdensome cost on just about everything! Remember that $147 crude was one of the variables that threw us into recession back in 2008. Ultimately, higher cost weighs down any recovery and increases the risk of another economic collapse. Higher price eventually crushes demand. That's classic demand/supply economics. But it also kills the economy, too!

Bottom line: the charts tell me the trend will continue until it kills the economy and with it, demand. Sorry if that's convoluted, but this is my thought process.

What makes me sick about all of this is how manipulated our markets have become. Bernanke denies the impact his policies have on the downside unintended consequences until its too late. He and his fellow "educated imbeciles" and "arrogant academics" ignore the risks and treat our economic future like a bunch teenagers with a chemistry set that won't stop until they blow up the neighborhood.

One of my best friends and most intelligent people I know told me months ago something that I keep thinking about almost daily. He has a photographic memory and spends all his time reading and studying, even to a fault. He said:
"Steve, we can not defy the laws of sound economics forever!"

Eventually, the consequences are going to catch up to us! I dread that day, but continue as best I can to prepare for it.

I hope that helps and isn't too arcane to be insightful for you, Gonzalo.

Ask God for insight in your writing, and He WILL help you and inspire you. Expect it and you'll receive it! Your warning voice can help many people to prepare and avoid risk. You have a MISSION to help people! I ask for help and inspiration every day in my trading. His guiding hand is critical!

Many regards and God bless!

Steve