Sunday, March 30, 2008

Commodities long term Top ?

In recent years most commodities had a huge run up. The Reuters CRB Continuous Commodity Index climbed more then 200%. By definition as a bull market is maturing there is less and less upward potential. I am sure there are many good reasons for commodities prices to be where they are and the outlook might seems even better but that is usually the case at cyclical top of any bull market.

Bull markets often end in a spectacular rally one in which big profits are made quickly. Have we just seen that?, Is the commodities long term top is in place ?

That's is not my point but the odds for multi month/year correction are certainly increasing.

The CCI index had surely proved itself to be the one index to follow this asset class.

CCI chart

CRB chart


John said...

I think we'll find out soon, like Tuesday. It looks like traders have moved the Fed Funds sept. contract up to 3% indicating that the interest rate cuts are over. I think it's really up to the strength of the dollar (monetary expansion v. credit expansion) it seems like credit is being reeled back in, the question that remains is how fast or slow will the increase in M3 be?

It doesn't take much at all to devalue a currency, but it takes significantly more effort to restore value.

troy said...

All is true, note CRB is at new high CCI isn't . what can be learned from that ? - oil , energy greatly outperform other commodities. what else?

John said...

Yes, certainly oil and natural gas have a great impact on the performance of the CRB and long reaching effects into the pricing of other commodities as well. I think that as long as oil continues to rise, other commodities are less likely to fall as rapidly (speculative positions aside, eg. wheat). Fuel is used in mining, harvesting, goods transport etc. and until fuel prices come down (whether through dollar appreciation, new wells, reduced dependency etc.) it will be difficult to entertain a commodity top position. With all the recent buzz though, I think it has provided a perfect opportunity for traders/investors to begin selling contracts as the johnny-come-lately's are buying; I'm watching the volume closely on both (oil/nat. gas) of these.

troy said...

Thanks John!

Yes , you are right it is hard to call a top in the commodity bull cycle. I was just trying to warn that the commodities bull market is extended and it is also hard to say that commodities prices are low. However, thing are moving so fast lately , the market is really wild and the risk is high on both side of the trade. just my opinion.

John said...

You know I was doing some looking last week, and while we may have hit the 'demand destruction' point in the commodities cycle, it's the not the CRB or CCI that should be shorted, but the GSCI! It's weighting makes it a more profitable index to short.

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