A review of important commodities which may provide clues as to both the strength and direction of the markets and the economy.
- If the economy was as strong as headlines suggest, the commodity index should be rising as demand for commodities grows. This was clearly apparent in mid-2017 as 3-major hurricanes and 2-massive wildfires devastated the U.S. requiring demand for raw materials.
- This same story SHOULD be evidenced in the following economically sensitive commodities as well.
- Economic activity has improved over the recent quarter after a rough patch this summer. In the 4th quarter commodity prices did break above $180 which suggests commodities could move a bit higher from here.
- However, with commodities very overbought in the short-term, and extended from their moving averages, we might see a spat of weakness first.
- Commodities can be added on a pullback that doesn’t violate $180
- Stop after purchases set at $178
- Copper, often called “Dr. Copper” because of its sensitivity to economic demand has remained weak as the rolloff of demand from natural disasters continues.
- We previously stated the overbought condition had been corrected and there is a “buy signal” close to triggering. That buy signal was triggered and copper advanced to the current downtrend.
- We previously recommended a trading position with a tight stop at $2.50. Take profits on that trade and watch for a break above the downtrend before considering a bigger holding.
- Move stops up to $2.65 on current positions, but don’t be in a rush to add new positions here.
- There has been a lot of talk about the strength of the housing market, and home builder stocks have been on fire as of late.
- However, while Lumber broke out of the previous consolidation range, it hasn’t gone anywhere yet and the previous deep oversold buy signal is being reversed.
- We previously noted that a break above $400 would make a trade more interesting, and would confirm a pickup in economic growth. We may be seeing that pick up in growth so we are watching Lumber closely.
- A position can be added with a tight stop at $380
- One look at this chart and you can understand why American farmers are filing for bankruptcy. It also makes you question the real “deal” that was cut with China.
- If China was really going to massively accelerate purchases of agricultural products, Soybeans should be hitting all-time highs. Since they remain bound to a lower trading range, the question that should be asked is what traders know that you don’t.
- Soybeans are extremely overbought and the risk is to the downside if China doesn’t meet their goals, which I suspect they won’t.
- A break above $940 makes Soybeans much more interesting, but the current risk/reward doesn’t suggest a trade.
- No trade recommended.
US Dollar Index
- With roughly 40-50% of corporate profits coming from exports, all commodities globally traded in dollars, and the dollar impact on the bond market, this is a key measure to watch.
- We suspect, as Michael wrote yesterday, that the “real deal” with China is a “devaluation of the dollar.”
- With the dollar breaking important support there is risk to downside to $91-92.
- With the Fed upping their “QE, but not QE” game, that also could very well negatively impact the dollar.
- No long trade on the dollar, but look to commodities, oil, and gold.
10-Year Interest Rates
- The “trade war” and “strong dollar” has pushed a lot of money into the U.S. Treasury market over the last year pushing rates to multi-year lows.
- We have discussed the extreme overbought condition needed to be reversed and are well into the process of that correction.
- It is unlikely that rates can rise too far before they begin to impact an already weak economy, but an initial retracement back to 2.1% is likely. A weekly close above 1.9% will signal a move higher is coming.
- Wait for a retracement to resistance before adding more bond exposure to portfolios.
- We previously sold half of our position to protect gains, and recently added back into our position with Gold holding important support at $1470.
- Gold has triggered a short-term sell signal, so support at $1425 needs to hold for the time being while the overbought condition is reversed.
- Hold positions and wait for a completion of the corrective process. If the dollar does indeed weaken as expected we should see gold reverse and break out of the current downtrend.
- Maintain at stop-loss at $1425
Oil – Black Gold
- Oil has been in a fight with trying to maintain price in the face of overwhelming supply and weakening demand.
- The good news is that oil held support at $54 and finally broke out of the long consolidation period.
- If old can hold above $60, and the dollar continues to weaken, we could see a move into the high 60’s short-term.
- We have recently added exposure to energy in portfolios, and we are looking for an opportunity to build larger holdings.
- That buy signal has been triggered.
Lance Roberts is a Chief Portfolio Strategist/Economist for RIA Advisors. He is also the host of “The Lance Roberts Podcast” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, Linked-In and YouTube
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