Was That a Bottom in Commodities?
There is not a trader alive who wouldn?t fall down on his knees and thank the Heavens he didn?t get involved in commodities last year.
I AM ONE OF THOSE TRADERS!
It?s not that we were without opportunities. With every downside swoon, we were barraged with claims from brokers, producers, and the Internet that THIS WAS THE BOTTOM AND IT IS TIME TO BUY!
It wasn?t.
So many fingers were chopped off by falling knives that there were enough to man several symphony orchestras, if not armies.
If you want to know who last year?s commodity bulls were they?re easy to find. Their resumes are all over Craig?s List, Linked In, and other head hunting services.
However, the price action last week is making me wonder whether we finally HAVE seen the bottom in commodities.
THIS TIME IT MAY BE DIFFERENT!
Look no further than my February 9 Trade Alert Buy the United States Oil Fund (USO) May, 2016 $8 calls at $1.12 or best. Today, they traded at $1.60, up a blistering 42.86% in just 9 trading days.
I put out this Trade Alert because I believed that oil would bounce hard off of a $26 double bottom. It did. Texas Tea is now trading just short of $32, a nice 23% pop.
Now I am a pretty good trader. But I am not THAT good. The only way to get this kind of instant result is to suddenly pickup a tailwind from a new market or economic force.
That may have been just what happened.
BUT WAIT! THERE?S MORE!
Guess what the top performing sectors in the market are this year?
Energy and commodities, as I predicted in my ?2016 Annual Asset Class Review? (click here).
Single stocks have gone ballistic since the mid-January lows, like Freeport McMoran (FCX) (+129%) and Occidental Petroleum (OXY) (+22%).
Indeed, oil stocks have made it back to their September levels, when oil was trading at $46. Which is underpriced now, oil or energy stocks?
You can see identical action across the commodities space. Railroads (CSX), (UNP), whose primary business is the moving of bulk commodities like oil and coal, are up 19% so far this year.
The foreign exchange market has been confirming these trends. The commodity heavy Loonie (FXC) has picked up 7.35% in 2016, while the Aussie (FXA) has roared up by 6.15%.
Those are humongous one-month moves for currencies.
Even the dreaded PowerShares DB Multi Sector Commodity Trust ETF (DBC) has eked out a 2.6% increase, which has been trading like death for years.
The amazing thing about the entire commodities space is that they are now showing identical fundamentals and price action, possibly for the first time in history.
This is because they all have several things in common.
ALL are now selling for less than the cost of production. That is a guarantee that new production won?t come on line. Bankers for these giant projects won?t finance a negative cash flow deal.
I can almost hear the clock ticking for the next supply shortage. Some long-term thinkers believe we could even see 2011 style upside price spikes by 2021.
There was also a lot of ?reversion to the mean? buying kicking in at the beginning of 2016. Think of this as ?dogs of the Dow? with a turbocharger.
To add Alpha, or outperformance, big institutions are forced to unload last year?s best performing asset classes (technology and biotech stocks) and load up on the worst performing asset ones (oil, commodities).
This year especially, the influence was exacerbated by structurally poor liquidity and high frequency traders. This is where your new volatility is coming from.
Virtually at the hour that all of these things bottomed, a reader called me and asked if this was the final capitulation.
I responded ?I don?t know if this is the final bottom, but this is certainly what final bottom?s look like.?
Adjust you portfolio accordingly.
