Commodity Based Stock Play

Our business focuses on the commodity complex. We rely on the Commodity Futures Trading Commission’s (CFTC) Commitment of Traders report to sort out what the major players are doing in the commodity markets. Our focus lies with the commercial trader category of this report. These are the traders who either have the commodity to sell or, will be using the commodity in their manufacturing processes. Following the commercial traders category, as a whole, for a given commodity can provide us with a consensus opinion from the world’s largest producers and end users of a commodity. There are times, like now, when their collective actions in the commodity markets can pay direct dividends to equity traders, both in individual stocks as well as commodity based ETF’s.

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Stock Indices Bottom at 2015 Lows

Most of our trading is based on the consensus opinion of the commercial trader group as reported in the weekly Commitment of Traders report. We track their behavior in a couple of different ways but the simple conclusion is that we want to buy when they’re buying and sell when they’re selling. You’ll see the net commercial trader position plotted in the second pane of the stock index charts, below. We measure their actions on a sum and momentum basis. This allows us to determine how anxious the commercial traders are to get their trades executed at a given price level which, in turn, tells us a lot about the importance of a given area. Obviously, the previous year’s lows are an important area. Based on the collective actions of the commercial traders across the major indices, we’ve issued a COT Buy signal.

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Bond Spreads Will Set Year’s Tone

Our theme continues, the Treasury Bond market spreads will set the tone for 2016. We wrote here at Equities.com on January 5th that, “US Bond Little Changed in Spite of Chaos.” The chaos has certainly continued with the S&P 500 off nearly 5% since then and China’s issues are anything but settled. It’s not very often that the workings of the global economy can be examined in real-time through the lens of a daily chart. We think the congestion in the U.S. interest rate markets is providing us with this rare opportunity as we speak and that its forecasting abilities could set the tone for the rest of the year.

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Commitment of Traders Report Points Towards Cheap Sugar

We’ve suggested that the recent rally of more than 50% since August 24th in #11 sugar futures is unsustainable, even to the point that we sold the market early in October in anticipation of its failure. As usual, the market told us exactly what we could do with our, “suggestions.” Fortunately, the consolidation between November and December has provided us with another chance to short the market. This time, perhaps even more decisively thanks to increased commercial trader selling as reported by the CFTC in its weekly Commitment of Traders report.

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US Bonds Little Changed in Spite of Chaos

The Federal Reserve has hiked interest rates for the first time in years, China is falling apart and tensions continue to grow between Saudi Arabia and Iran. The combined chaos these events have generated have moved the 30-Year Treasury Bond futures less than one handle over the last year. In fact, the converted yield on the 30-year Treasury Bond futures has risen .0726% over the last calendar year. Therefore, in spite of the noise in the markets, the reality is that not much has changed.

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