Have commodities hit bottom?

Looking at the CRB Index (CCI) we see it opened last week at 570.59, hit a low of 563.19 and closed the week at 574.71. Looking at the charts below you can see that both the daily and weekly show this market has been in a range between 620 and 660. The market broke below this range on Sept. 22 and did not stop dropping until hitting last week’s low of 563.19. Of course, once again we are seeing new 52-week highs in commercial positions in many markets. This is the time when you will want to watch for an exit if you have taken shorts in the markets and are sitting on some solid OTE like we are at Trends in Futures. For all of you grain traders, make sure you are aware of the Wednesday WASDE report being released. It could cause a major move in the markets. More importantly, you will want to keep an eye on the COT week to week. If we see commercials moving away from their 52-week highs, then you can expect that market may have hit its low. It does not happen in a day or even a week. It is just the underlining big money movement in the market you are trading, movement that will affect the markets sooner or later. Of course Merkel’s comments once again are affecting the markets today, supporting the banks with tax payers money.

Fundamentals

Commodity traders could be excused for thinking that a black box has taken over the fundamentals in the specific commodity markets we trade. Indeed, the number one market-moving factor for the commodity markets in recent weeks has been the stock market rather than underlying supply/demand factors. Moreover, it is not really the stock market itself that is driving the commodity markets; rather the stock market is simply the proxy for the bigger market mover of perceptions of global economic strength and commodity demand.

The correlation between stock and commodity markets is particularly strong when there is a strong shift in the economic outlook, especially when the outlook is shifting downward. At present, there has been a significant deterioration in economic expectations and this has helped to take down commodity prices along with stock prices. We are in a time of stress, when the European debt crisis has caused worries about another Lehman moment, causing hedge funds and institutions to take off riskier positions such as stocks and commodities.

We are currently in a “risk off” mode of the risk-on/risk-off (RORO) model where traders are selling riskier assets such as stocks and commodities because of fears about Europe and indeed China, which is facing its own problems tied to weaker exports, bad debt and a sagging real estate market. When the markets are in risk-off mode, correlations are particularly high between stocks and commodities. The plunge in gold prices is particularly indicative of a risk-off model because gold is being dumped even though it should benefit from stress.

What does this mean for traders? First, pay particularly close attention to the risk factors that are driving the markets such as the European debt crisis and China. Macro fundamentals are more important at present than specific commodity fundamentals. Second, recognize that your trading portfolio is much more highly correlated than usual. For example, a trader might be long stocks, crude oil and corn for reasons specific to those markets, but those markets are all going to move in the same direction if there is fresh bearish economic news

Have a prosperous trading week.

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