Tag Archives: equity markets

Oil, Gold, Grains – Was that It?

Has the commodity rally that began just before the New Year ran its course? We posed the argument in early January that the technical breakout in interest rates would point towards the general economic activity of 2016. The interest rate breakout higher, towards lower rates would ultimately show itself in the form of deflation, which would in turn, weaken the commodity sector. I believe we are at a major inflection point for the year’s trading.

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Breakout Ahead for S&P 500 Futures

Traders and commentators often use the phrase, “Dog days of August” to describe market action. Unfortunately, the general public seems to view this as a statement of late summer weakness, rather than as the low volume, stagnant, range trading action that it actually means. The S&P 500 has been in a 5% sideways trading range between2020 and 2120 since February.  We’ll look at option, technical and seasonal analysis that could push this market to new highs and break the summer doldrums.

Continue reading Breakout Ahead for S&P 500 Futures

Equity Rally Waves a Caution Flag

The equity markets have been THE place to be for capital appreciation over the last few years. Last year saw the Dow Jones under perform with a 9.6% return compared to the S&P 500 at 13% and the Nasdaq 100 at a whopping 19%. In spite of the impressive returns provided by the stock index futures last year, there were still periods of flatness and even outright declines. In fact, the Nasdaq had a decline of more than 10% from peak to trough at one point last year, in spite of its 19% return for the calendar year. This week, we’ll discuss a method of applying the commercial traders data from the weekly CFTC Commitment of Traders reports to the equity markets in an attempt to preserve profits gained on the long side of the markets as well as profiting from forecasted declines.

Continue reading Equity Rally Waves a Caution Flag

Equity Market’s Race to the Top

The equity markets have just been rip roaring strong. Companies like FedEx, Google, Morgan Stanley, Walt Disney and Boeing have all gained more than 40% this year. The equity markets have made new all time highs, eclipsing the pre-crash highs from 2007 with hardly a shudder and soldiering on past the tech bubble highs of 2000. Recently, the technical analysts at Merrill Lynch came up with a four-year target of 2300 in the S&P 500. This is based on their analysis of the long-term pattern that was triggered by the new highs. The S&P 500 has climbed more than 150% since March of 2009. While I’m the first to admit that I’ve left a lot of money on the table by not sticking with the long side of equities, I’ve been doing this long enough to know that there’s always another trade. Therefore, I will not be committing new money to the long side of the equity market at these levels in 2014.

The way I see it, there are two opposing forces at work here. First, we have the Federal Reserve Board that keeps pumping money into our economy. The Fed continues its easy money policies indefinitely. There are seven voting members of the Federal Reserve Board of Governors. Six of them have been broadly categorized as dovish, in favor of easy money/stimulus. There are four more rotating members from the national Federal Reserve Banks. This is where things may get a bit interesting. Three of the rotating members gaining a vote in 2014 are centrist to hawkish. While the doves are still clearly in control, especially with Janet Yellen expected to assume the Presidency of the Board, the dialogue in the minutes of their meetings could change substantially.

The easy money policies have favored the equity markets in a couple of different ways. The artificially depressed interest rates have forced investors to accept more risk for returns that used to be outside the scope of retiree investing. The stretch for yield has driven a boom in riskier corporate bonds as investors move down the ladder in an attempt to maintain their portfolio’s value. This has caused a surge in lower credit bond prices reminiscent of the sub prime mortgage debacle of the mid 2000’s.  Investors’ lack of satisfaction with the governmentally manipulated yield curve has led them to seek returns in the stock market specifically, through high yield investments like Real Estate Investment Trusts and utilities. What has gone unnoticed is the disappearance of nearly half of the companies listed on U.S. exchanges. Therefore, there’s more money than ever chasing a smaller number of stocks in the last 25 years.

Secondly, we have reached valuations that bode poorly for long term investing. Research abounds on the usefulness of long-term valuation models. Very simply, expecting these returns to continue through long-term investment at these valuations would set an historical precedence. Anything can happen in the world of markets but the odds clearly show that bull markets do not begin when the P/E ratio of the S&P 500 is above 15.  The S&P 500’s P/E ratio currently stands above 19 and Nobel Prize winning Yale economist Robert Schiller’s cyclically adjusted price earnings (CAPE) ratio is over 25. Both of these will continue higher as long as the equity markets continue to climb. Neither is sounding the, “Everyone to cash,” alarm bell. Their history simply suggests that it would be foolish to expect these multiples to continue to climb and climbing P/E ratios are necessary for stock market growth.

Closing in on 2014 has left many money managers whose performance is benchmarked against index averages scrambling to catch up. There are two ways a manager can do this. First, wait for a sell off and try to buy in at a discount. This is part of the reason that the weakness in July, August and October was so quickly recovered. Second, apply leverage so that the manager’s fund gains more than $1 for every $1 the market moves. Leverage seems to be the move of choice. This year has seen a huge inflow into equity mutual funds, which have to be benchmarked to their index. By comparison, each of the last two years saw net equity mutual fund outflows. The added influx of cash has led investment managers into the futures markets, specifically the S&P 500 futures. The most recent Commodity Futures Trading Commission’s Commitment of Traders report shows a 10% growth in leveraged longs as well as a 5% decline in leveraged shorts. Finally, margin debt on the stock exchange itself has also reached an all time high.

The case I’ve laid out says nothing about where we’re going. Liken this presentation to a new home survey. The place has curb appeal. The neighborhood is growing. The government is supporting its growth. Each new home sells for more than the last. What could be wrong with buying now? Well, the inspector may inform you that everything you believe to be true is resting on a shaky foundation. The house may stand for years or, not. Personally, I’d rather be in on the ground floor than looking for a window to jump out of having climbed in at the top.

Insidious Effects of the Dollar’s Decline

The United States is home to the largest and most liquid investment markets in the world. There’s hardly a market one can think of that isn’t exchange listed. This has made the United States the primary destination for excess global capital placement whether it has gone towards the relative safety of government bonds or been more aggressively allocated towards stocks, ETF’s or even the futures markets. The final destination of the investible funds is less important than the singular characteristic that all these investments have in common. They’re denominated in US Dollars and the Dollar’s value may be more meaningful than the underlying asset class.

Investment securities are not protected from the vagaries of their underlying currencies. Therefore, globally allocated investments owned in US Dollars can lose money in a flat market if the Dollar declines. The Dollar peaked in early July and has since fallen by more than 6%. Therefore, if your US equity portfolio hasn’t gained more than 6% since July, you’ve actually lost money. The Governmental shut down has accelerated the recent slide and pushed the Dollar to a new 30 day low for the second time this week. This is only the second time since May of 2011 that we’ve made multiple 30-day lows in the same trading week.

Perhaps more troubling to global investors than the currency-based loss is the fact that the traditional safe haven investments, even in Dollar terms, have not behaved as expected. The primary relationship between the Dollar and the US equity markets since the financial implosion of 2008 has been negative. This has been embodied by Dollar rallies on stock market declines. Very simply, foreign capital gets converted to US Dollars and placed to work through buying declines in the stock market. Conversely, when foreign investors take profits in a rising stock market and convert back to their base currency, the Dollar falls.

We also see this relationship play out in the gold market. Economists on TV tell us to buy gold as a defense against a declining US Dollar. Sensationalists point to the overwhelming debt being created by our country and tell us to buy gold because our country is on the verge of implosion and our currency will become worthless. Speaking of correlations, it’s amazing how many of the people saying this are the ones selling gold investments. Astute investors would notice that the correlation between these two markets has been trending upwards since early June. This means they’re moving in the same direction more frequently rather than opposite each other as expected.

Foreign purchases of US goods have always been Dollar dependent. Every nation and agricultural enterprise within every nation is forced to tie their commodity purchases accordingly. Therefore, it becomes especially disturbing when a weaker Dollar fails to attract foreign purchases of global staples. Beginning in August of 2012 we started to see the commodity markets decouple from the US Dollar. Wheat was the first market to be sated. Corn followed suit in October of 2012 and hogs joined the new normal last November. This means that even base foreign needs have been filled. Therefore, they are more likely to trade in the same direction as the Dollar going forward rather than the typical negative correlation that we’ve seen from bargain hunters looking for inflation in the commodity markets.

The International Monetary Fund (IMF) stated that world Consumer Price Index (CPI) came in at 3.2% year over year for August. This is down from 4.9% a little over a year ago and ties in rather neatly with gold’s last run at $1,800 per ounce early last October. The US unemployment rate is generally believed to be artificially low in the as reported number of 7.3% and Gross Domestic Product (GDP) here in the US came in at a very tame 2.5%. These statistics, combined with a low global industrial capacity usage number suggest that inflation is nowhere near. Furthermore, the Federal Reserve Board’s recent decision not to implement a tapering of the $85 billion per month in economic stimulus reinforces the notion that their primary concern is deflation, rather than inflation.

Many economists believe that we may be near a tipping point in the bull run that has followed the economic meltdown of 2008. The obvious concern now lies in the protection of the wealth that’s been garnered during the recent run. Clearly, the ownership of alternative investments isn’t going to play out the way the pundits have suggested. Therefore, investment vehicles that will profit from a decline in both asset value and currency depreciation should be seriously considered. These include inverse ETF’s as well the futures markets, which will allow the seamless execution of short trades including currencies. Equity futures spreads selling small caps like the Russell 2000 and buying big caps like the S&P500 are also a good idea when expecting volatile, downward markets. Remember that cash is only king as long as the King’s throne isn’t sinking.

Calling a Top in the Equity Markets

Back in the old days when the trading pits were full of people executing trades we had a saying, “The market always finds the orders.” This is quantified by the market through the comparison of volume and open interest levels against the price levels that generated the activity. The first rule of trend trading is that growing volume and open interest supports the market’s current direction. Last week we discussed the idea that the stock market may be establishing a late summer high with probable declines into fall from a big picture outlook. This week, we get technical.

Monday, August 5th, the S&P 500 futures traded approximately 850k contracts. Only one normal trading day in the last few years has done less volume than that. Typically, we’re looking for twice that much trading on a normal day with bigger days eclipsing the 3 million contract mark and big days reaching over 6 million like we did during the August sell off in 2011. Monday’s volume more closely matched the Christmas and New Year averages around 600k. Low volume is usually accompanied by low volatility and Monday’s trading range of was the smallest since August of last year and all the way back to April of 2011 before that. Thus, even the holidays of recent years generated more market movement.

Lower volume doesn’t always mean dying trends. There are times in a market’s trend typically, following the accumulation phase when volume will decline but open interest grows as the market begins its march in small orderly steps. Unfortunately, this is not where we stand within the equity markets’ current trend. The S&P 500 futures expire quarterly. Therefore, those who wish to maintain a position going forward have to re-establish it as their current contracts approach expiration. Those who do not may simply let their contract expire. Market participation in the futures markets is measured by open interest. Theoretically, open interest has no upside limit. As long as two new people come to the market and negotiate a trade, open interest will increase by two. One new person (long) is making a bet on higher prices going forward while the other new person (short) will profit from a falling market. Open interest in the S&P 500 futures is at its lowest levels in over a year. This means that the current market price is completely uninteresting to potential market participants.

This leads to the obvious question, “If the market is uninteresting, who’s trading?” We began to answer this question last week in our discussion of margin buying and human nature’s, “catch up” instinct. Margin buying in the stock market is borrowing money from your broker who charges you interest so that you can buy more stock than the available cash value in your account will allow. There have been four all-time highs in margin buying – 10/1987, 4/2000, 9/2007 and right now. The previous peaks all led to declines of at least one third within next 12 months. Remember the leveraged nature of the housing bubble? Leverage begets leverage…until it crumbles. Commercial traders and their large bank accounts have gladly sold all that the public wishes to purchase at these levels.

Finally, we have current technical and pattern analysis that clearly believes there is more money to be made on the expectation of downward pressure on the stock market rather than continuation of the upward trend we’ve been experiencing. One of the primary tools I utilize is the analysis of divergence. The idea is to gauge the market’s momentum by measuring various calculations against each other. The results are then plotted below the chart and we simply look for a market that has made a new high or low without a momentum confirmation. The all time highs made in the S&P 500 last week have not been confirmed by any of the popular indicators and their textbook, default settings. Meanwhile, pattern analysis shows that we have just created a broken cup with handle formation. This is a normally bullish formation gone wrong due to the currently overpopulated and leveraged speculative participation rate.

Owners of equities, mutual funds and their equivalent ETF’s should seriously take note of the warning bells. If recent history has taught us anything, we should know that six years of nowhere to new highs can be an emotionally traumatic interim. I’m not suggesting dumping the family holdings whose cost basis is now next to nothing. I am suggesting that those who’d like to sleep peacefully should look into the various ways of providing downside protection for their portfolios with advisors they trust. Insanity is doing the same thing repetitively while expecting different results. This time may be different but I’m not betting on it.

This material has been prepared by a sales or trading employee or agent of Commodity & Derivative Advisors and is, or is in the nature of, a solicitation. This material is not a research report prepared by Commodity & Derivative Advisors’ Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.

The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that

Commodity & Derivative Advisors believes are reliable.  We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.

What’s Wrong with Equities

The economic black hole between the equity markets and the man on the street has never been greater. Earlier this month the media trumpeted about the all time highs in the Dow Jones Industrial Average. The President commends Congress for creating policies that “put Americans back to work,” and points to unemployment levels that are 25% below their 2009 peak. Meanwhile NBC News publishes the results of a new study, which states that four out of five of us will, “struggle with joblessness, near-poverty or reliance on welfare for at least parts of their lives.” Please bear with the following few paragraphs as we discuss the social issues that we all feel and use some correlational analysis to come up with a trading plan.

Anecdotal evidence of the government’s failed economic bailout plans to help the working class and small businesses abounds. Finally, we have some research that quantifies where TARP funds went as well as how much of the stimulus reached its intended target. We suggested five years ago that the major banks who were deemed, “too big to fail” were more likely to sit on the funds they received in order to shore up their own loan to equity ratios than they were to make those same funds that had been ear marked for small business creation and maintenance available to them.

The best summation of these events comes from John Mauldin, a republican economist from Texas. “We are watching the Fed employ a trickle-down monetary policy. They hope that if they pump up the banks and stock market, increased wealth will lead to more investment and higher consumption, which will in turn translate into more jobs and higher incomes as the stimulus trickles down the economic ladder. The kindred policy of trickle-down economics was thoroughly trashed by the same people who now support a trickle-down monetary policy and quantitative easing. It is not working.” Mauldin’s condemnation of trickle down economics is especially telling given his own personal background.

The government bailed out the owners of the large banks and their related business entities. Warren Buffet’s Berkshire Hathaway is a good example. When the financial crisis set in Mr. Buffet, who already owned a considerable position in Goldman Sachs, doubled down as the stock hit the skids. He was betting that the Goldman was, “too big to fail” and that the government would bail them out, which they did. Goldman Sachs received $10 billion in TARP aid. Berkshire Hathaway stock is 10% higher now than before the collapse and is up approximately 30% this year. The point is that those with equity ownership and the resources to increase their equity ownership by using the Federal Reserve as a backstop profited handsomely. Unfortunately, a Gallup poll shows that the percentage of Americans owning individual stocks and securities is at its lowest level since 1999 and has declined by 13% since 2007.

Human nature is a terrible trader. The scarcer something becomes, the more we want it. The more that’s available, the less we want it. When stocks were cheap, we were scared. We as individuals are never, “too big to fail.” Collectively, we rarely succeed. This is evidenced by the recent run up in margin buying, which just hit a new all time high. Margin buying is akin to buying stocks on leverage. Currently, investors are only required to put up 50% of the face value of a stock and the brokerage house, “loans” you the balance. The last recent highs were 2000 and 2007. Ring any bells? This is a significant indication that individual investors are doubling up at the top to catch what’s left of the rally they’ve missed. Conversely, When the Federal Reserve Board announced a possibility of easing back on the stimulus and bonds tanked, these were the same people pulling their money out. This is a clear, ugly and leveraged speculative rotation.

The markets themselves tell a different story. The Fed can’t afford to let off the stimulus gas just yet and the major market players know it. They also see the sucker top forming in the equity markets. The appropriate strategy we see is to tighten up equity risk and look towards the long end of the yield curve to regain some of its losses. Frankly, we think moving from equities to bonds should be the primary move between now and October. Take advantage of the access to information we now have and know that ignorance is a choice.This material has been prepared by a sales or trading employee or agent of Commodity & Derivative Advisors and is, or is in the nature of, a solicitation. This material is not a research report prepared by Commodity & Derivative Advisors’ Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.

The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources thatCommodity & Derivative Advisors believes are reliable.  We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.

Tax Hikes We’ll All Feel

The election is over, the dust is settling and the economic landscape is coming into focus. The fiscal cliff and the Federal debt ceiling dominate the immediate foreground. Both of these issues come down to the business practices of revenues and expenditures.  However, since this is the government and not a business it will be subjected to gamesmanship and hyperbole as both political parties spin their solutions in an attempt to come out, “a winner.” Unfortunately, the reality is that regardless of the spin, you and I will end up paying more for the year that’s already past as well as the coming years.

The post election stock market selloff is no aberration. Wealth, for many has come through the ownership of equities. When it comes to the vast ownership of equities we can quickly narrow the demographic to investors who’ve chosen wisely over the years and benefitted from their patience in the market. However, the economic crisis of 2008 saw the equity markets halved in the blink of an eye. When global market uncertainty is combined with rising estate and capital gains taxes, its no wonder that investors are pulling money out of a stock market that has very nearly recovered to 2007 levels, especially when the rally appears to have run its own natural course.

The estate taxes and capital gains tax increases may seem a bit out of touch with the everyday person but the alternative minimum tax (AMT) is something that will affect more than 70% of U.S. tax payers, according to the New York Times. Here’s the real world perspective you need prepare for. The Washington Post stated that the average income tax refund is $3,000. The expansion of the AMT will levy taxes on individuals earning less than $200,000 and married couples earning less than $250,000. The cost as applied to the middle 20% of all earners will be $888. The net effect will be nearly a $4,000 adjustment to your lifestyle. Furthermore, there will be no tax refund. In fact, odds are you’ll have to pay more taxes instead.

The combined effects of the tax increases for the middle 20% of earners ($40k-$65k) will be an increase of about $2,000. However, it is important to understand that this is an additional pay in, on top of the tax refund you probably won’t receive. Therefore, the net change in your spending habits will have to account for about $4,000 less in 2013. The same numbers for the top 20% (more than $108k) is about a $14,000 difference.

The second part of the fiscal cliff is the debt ceiling. Most of us are now familiar with this term thanks to the political standoff last summer that brought about the first credit downgrade of U.S. Treasuries in history. The debt ceiling is currently set at $16.4 trillion Dollars. The argument over the debt ceiling is the same as our family deciding which bills to pay except, rather than laying out a course of action, the politicians simply ask the Treasury to print more money. These arguments are about funding the same programs that they already passed (but shouldn’t have) in the budget. Technically, if Congress doesn’t raise the debt ceiling then the government has to decide who gets paid and who doesn’t, just like the rest of us.

The debt ceiling has, historically, been a non-event. It has been raised 76 times since it was first enacted in 1962. However, the economic welfare of this country and its citizens is being held hostage by both political parties as they attempt to find a deal that works best for themselves individually, rather than us collectively. Currently, there is talk of forcing the U.S. off the fiscal cliff in order to gain a political advantage as one side blames the other. The sad part is that it really would come down to whom has the best spin-doctor to sell the U.S. population on their version of what happened. After all, it’s not like someone is going to stand up and take responsibility. I believe the reality is that the truth is usually somewhere in the middle and most decisions aren’t as black or white as they first appear. Therefore, very little will be done, just enough to keep us rolling. Alarmingly, that may be the biggest problem of all as we are tossed back and forth between Scylla and Charybdis.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Austerity Rebellion

Far too many market events transpired this week to focus on any single event. The general consensus of the week’s events can be summed up as deflationary. Unfortunately, this bodes poorly for global economies and unravels the tenuous global grasp on a Greek default and European Union unrest. We’ll take a brief look at the Greek and French elections, their effect on deflation and social unrest and finish with three places to invest that should beat negative yield Treasuries and deflationary assets.Francois Hollande of the Socialist party, was elected as the next French President. He was widely expected to win and yet the realities of his policy intentions are just beginning to sink in. France has been the peacemaker in the European Union’s economic crisis between the austere and fiscally solvent Germans and the spendthrift southern European nations like Spain and Portugal. France is far from altruistic in their pursuit of bailout money. The fact is France is already at 85% debt to GDP and their balance of trade has been negative for 8 years. President elect Hollande understands that his nation is next and wants to ensure a bailout path for his own people. France is the 10th largest global economy and is too big to bail out economically and too entrenched in their ways to elicit any sympathy from the hard working Germans. President elect Hollande won the election on the basis of remaining French, which means increasing government expenditures. He is in favor of retaining the 35-hour workweek, returning retirement age to 60 and adding 60,000 government paid teachers. His Keynesian approach to the economy will not fly with the austere Germans.

Meanwhile, the Greek elections have led to complete rejection of austerity and economic reforms by its election of two primary winners from parties that have been peripheral parties for the last 40 years. Imagine a runoff here in the U.S. between Ron Paul and Ralph Nader and you’ll get an idea for how strongly the Greek people have rebelled against the two mainstream parties that have been the negotiators of their bailouts. The Greek people have thoroughly rejected the bailout parties leaving Germany’s Chancellor Angela Merkel to reiterate her position that Greece must make its budget targets or Germany will not allow the next bailout of 30 billion Euros to flow through in the next quarter. The Greek people would rather be broke and miserable by their own choice rather than broke and miserable under someone else’s thumb. Some estimate that there is now as much as a 75% chance that Greece will leave the Euro in the next 12 months.

The effect of the French and Greek elections has caused the U.S. equity markets to stumble and U.S. Treasury yields to hit historic lows. Currently, only the 30yr Treasury Bond offers a real rate of return above 0. Those moves have behaved in their normal relationship. Uncertain equity money moves to the safe haven of Treasuries. However, the behavior of other safe haven investments suggests much deeper economic concerns. Gold has begun to lose its status as a safe haven investment as it has declined more than 4% since the election results. We’ve also seen the currencies of commodity based countries fall relative to the U.S. Dollar. Previously, these declines have been buying opportunities as the liquidity that has been pumped into the global economy has been viewed as commodity inflationary.

This brings us to three places where money can be placed and be expected to hold its own and then some. First of all, the U.S. Dollar is going to benefit as the safe haven for the tremendous amounts of cash that get pulled from foreign equity and bond markets as the result of a disorderly Grecian default and an unraveling commitment to German austerity measures. Secondly, as people decide what to do with their money foreign denominated CD’s will become more favorable. For example, Australian Dollar CD’s can yield better than 2.5% and they’re one of the few countries that are both economically developed and debt free. Finally, there are still some supply and demand relationships in sugar, soybeans and platinum that should hold true without too much correlation to the global economic disaster. After all, economic depression has to be pretty serious before people stop putting syrup on their pancakes.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.