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 in investing in futures.
The last two weeks have brought considerable pullbacks in major trends including, the stock indexes, metals, grains and energies. We’ve also seen the most convincing U.S. Dollar rally in a year. This seems like a good place to take a step back and assess our positions on the broader markets.First, let’s break down the numbers and the correlations. The march of the commodity rally has been timed by the Dollar’s decline for nearly a year. Over the last month, we’ve seen the Dollar rally about 4% off of its lows. The rally became news over the last three weeks. Looking at a weekly chart, one can see that this is the first time the Dollar has taken out a previous week’s high and not immediately, closed lower the following week. Fortunately, we were able to see that the commercial trader’s momentum by using the Commitment of Traders Report had turned bullish on the Dollar beginning around Christmas time and we finally published a buy signal on January 19th’s COT Signals.The issues facing the commodity markets are twofold. First, the Dollar’s decline made our raw materials cheaper to purchase on the world markets. Secondly, as the commodity markets rallied, Commodity Index Traders, (CIT’s), are forced to buy more futures contracts as the value of their index rises. They are required to maintain a certain percentage of their indexes value allocated to the markets as stated in their prospectus. Consequently, as the commodity markets have declined, they’ve been forced shed contracts to maintain their waiting. Their influence on the markets can be seen in the disproportionate moves in the commodity markets – both on the way up, and on the way down. This is one of the reasons why the Dollar’s 4% rally has created the following declines:6.5% – 8% in the stock market15% give or take, in the grain markets15% in silver10% in platinum5% in gold14% in crude oil13% in unleadedOak, so where do we stand? Throughout this decline, the Commitment of Traders Report has seen commercial traders increasing their rate of buying in the raw materials markets and increased their selling in the stock indexes to correspond with their buying of the Dollar. We have watched the momentum of their purchases increase in the raw materials just as the Commodity Index Traders positions have declined and watched the opposite hold true in the negatively correlated U.S. Dollar vs. stock indexes. This is the classic example of why we follow the momentum of buying or selling within the commercial trader category. We’ve been patiently waiting and waiting with relatively few trading opportunities. As of Friday, we reached oversold levels in many of the markets that still maintained bullish momentum. Beginning on Tuesday’s trade, our proprietary indicator began ticking out buy signals in the energies and metals. This was followed immediately with buy signals 9 other markets. This means that our methodology has kicked out 16 buy signals in the last two days. That’s 16 buy signals out of 36 markets tracked. Finally, I would like to briefly note the background themes over the last month as this has built. We have the Dollar devaluing concerns of the health care bill which were mitigated by Brown’s victory. The equity market concerns over earnings realized through labor market cost savings and finally, the governmental budget issues which are beginning to kick out inflationary signals in our own programs. Our end of January position leaves us with reasonable demand for raw materials and inflationary concerns over the bond market leading to weakness in the stock indexes.
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