Commodities Rally But May Need A Breather

To start the year I said my one prediction for 2014 was that commodities were too beaten down and could rally. We finished 2013 with sentiment at historic lows and it seemed everyone had turned their back on this asset class.

In Phil Pearlman’s Yahoo! Finance article, 2014 Predictions from Some of the Smartest Market Watchers I said:

Sentiment for agriculture and metals are at or near historic lows. For example, nearly all three categories of the Commitment of Traders report, Commercial, Large Traders, and Small Traders are short or near a net-short position for gold. Typically we see the most hated areas of the market one year rotate back to strength the following year. I’ll be watching to see if this happens for the commodities market in 2014. While commodities are very weather dependent, there’s a chance we see at least a partial rotation back to the beaten down agriculture and metal markets.

Well I didn’t expect commodities to rally as fast as they have. Year-to-date the PowerShares Agriculture ETF ($DBA) is up nearly 11% and gold ($GLD) has advanced 7% while the equity market has gained just 1%. I still think commodities could see higher prices, especially with the awful winter most of the country has been having as well as the drought that’s hit the west coast.

However, I think the current rally is becoming a little overextended and must now contend with trend line resistance. Below is a weekly chart of the PowerShares Multi-Sector Agriculture ETF ($DBA) going back to 2010. I’ve drawn a blue line to connect the previous highs and this takes us to where price currently sits this week. $DBA has broken out of its weekly Bollinger Bands, as has the Relative Strength Index which is in the top panel of the chart. With stocks not replicating the 2013 pattern of “never go down” traders appear to have come to the realization that there are in fact other asset classes to own! The difference in the current rally compared to what we saw in 2010, was the slow advance that took commodity prices to historic highs. We rarely saw price break above its upper Bollinger Band on the weekly chart as buyers formed an orderly line to pick up their shares.

I would be comfortable with seeing $DBA consolidate at current levels or test the previous high near $26 from last October. This would allow those that have missed the boat the opportunity to participate and potentially take the ETF to its 2012 high of $31.

DBATaking a look at sentiment, specifically the COT data set, we can see traders have pushed this measure near historic levels. SentimenTrader creates this Commodity COT Master Indicator to show a global picture of commodity sentiment and how traders are currently positioned. While we aren’t there at highs yet, we are approaching a level that has previously cooled off rallies in the past.

COT Sentiment

Commodities are still an asset class I am watching for 2014 and is a place we may see traders seek shelter during any increase in volatility within the stock and bond markets. We’ll see what happens.

Source: SentimenTrader

 

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

The Important Question Traders Must Ask

In November, as the lofty sentiment data continued to roll in, as the stock market trekked higher I wrote a post titled, The Biggest Question Traders Face. In it, I describe how we are climbing a mountain of stock prices but we don’t know how tall the mountain is or when we’ll reach the peak. I dive into this topic once again in my piece for TraderPlanet this week, looking at a recent WSJ article that discusses how retail traders are coming back to the market.

Here’s a piece:

This same concept applies to trading. We see citations of near-record high margin debt and comparisons to 2000 and 2007. But who are we to say that the current climb we are on is the same “height” as those we made going into 2000 and ’07?  In 1997 margin debt more than doubled from 1994 levels and was even three times higher by 1999. We weren’t climbing Mt. Cho Oyu, we were climbing Everest and an Everest-like decline eventually followed!

Read the rest: The Important Question Traders Must Ask (TraderPlanet)

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Weekly Technical Market Outlook 2/24/2014

Sorry for getting this post up a little later than normal. My birthday was on Sunday so I was out with friends most of the weekend, leaving me little time to write. Nonetheless, while shorter than normal I’m still getting my charts updated and will be back will a ‘fuller’ version of the Weekly Technical Market Outlook next week.

Equity Trend

While the S&P 500 ($SPX) closed just slightly in the red during the shortened trading week, we are still in an up trend for the equities market. All eyes are on 1850 as bulls will be biting at the bit to set a new high.

SPX trend

Equity Breadth

Last week produced some more strong trading sessions in respect to market breadth, with the Advance-Decline Line setting another new high. While the underlying indices are still battling with resistance we are seeing a larger amount of NYSE stocks staying in the green, which is what’s pushing this measure of breadth higher. The Percentage of Stocks Above Their 200-day Moving Average indicator is still in its range. We were unable to see a break of 72.5%, which is what’s needed to get us above the previous three highs since last July.

breadthEquity Momentum

We are still seeing some signs of struggle in our momentum indicators. As previously mentioned, the S&P 500 ($SPX) has yet to set a new high, but at least it’s gotten close. We can’t say the same for the Relative Strength Index which hasn’t even broken 65. As I wrote in last week’s Technical Market Outlook, the market was able to work through these divergence throughout 2013 trading as price marched higher, but the sign we need for this pattern to continue in 2014 needs to come from market breadth. If we can get more stocks confirming the up trend then it makes it easier to ‘forgive’ momentum from being weak. However, if both momentum AND breadth begin to weaken, then that’s when we’ll start raising a red flag.

momentum

Business Cycle

At the end of last year I wrote a post called Where Are We In the Business Cycle? As the asset classes have improved, I wanted to show an updated chart from that post. In the post from December I showed how bonds ($USB), stocks ($SPX), and commodities ($GSG), performed going into the previous two market peaks. At the time we were seeing commodities flirting with its bull market trend line, as well as bonds experiencing a bout of weakness. With the resurgence of buyers stepping into the bond pits, and commodities showing signs of a rebound, all three asset classes continue to hold their up trends, which is positive for the current business cycle.

biz cycle

60-Minute S&P 500 

I’m glad to see futures positive this morning, because the short-term chart for equities doesn’t look great. As I’ve mentioned, we struggled with setting a new high last week putting in a potential short-term double top at 1846 with the Relative Strength Index and the MACD putting in bearish negative divergences. We did see support come into play with the 50-1hr Moving Average, which held off sellers last week. If we see continued selling I’ll be watching to see if this moving average can hold once again or if we begin to head lower and test the previous low of 1810.

SPX 60min

Last Week’s Sector Performance

Last week we saw energy ($XLE) continue to show strength as it came in on top for the second week in a row. Health care ($XLV) and utilities ($XLU) also showed strength while the overall equity market closed out the week slightly in the red. Once again, the financials sector ($XLF) was the worst performer during trading last week.

week sector perfYTD Sector Performance

So far 2014 trading as shown a strong bias to the defensive sectors, with utilities ($XLU) and health care ($XLV) continuing to be the stars YTD. Interestingly, the consumer staples sector ($XLP) is acting as the ugly step child of the defensive portion of the market, straying away from its two counterparts as it has now beaten out energy as the worst performing sector year-to-date.

YTD sector perf

Major Events This Week

While not an often discussed economic data set, this week we get the Chicago Fed National Activity Index, which in my opinion gives a great read to where we are with respect to economic growth. Q4 2013 GDP data comes out on Friday which will garner much attention as the week progresses.

Monday: Chicago Fed National Activity Index
Tuesday: S&P Case-Shiller Home Price Index
Wednesday: New Home Sales
Thursday: Jobless Claims and Durable Goods Orders
Friday: GDP and Pending Home Sales

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.