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.

Weekly Technical Market Outlook 12/16/13

Last week we saw the equity market add to its slight loss for the month of December, down nearly 1.65% for the week. Most of the loss came on Wednesday with Thursday and Friday following it up with just a few additional points lost on the S&P 500 ($SPX). With that, let’s get into this week’s Technical Market Outlook….

Equity Trend

Things continue to be positive on the daily chart of the S&P; we have lost the support of the 20-day moving average but continue to stay above the 50-day and the trend line off the 2013 lows.

S&P 500 TrendEquity Breadth

With the weakness in the equity market last week we saw a continued drop in market breadth. The Advance-Decline line tested has moved closer to support but remains in an up trend. JC Parets wrote a great post on his blog, All Star Charts, taking a look at breadth as well as the McCellan Osc.which is a tool used to measure the momentum of the Advance-Decline line. Check it out to get another view of market breadth.

Equity Momentum

The divergences in our three momentum indicators continued to lead the market lower. The Relative Strength Index (RSI) has yet to drop to prior support but recently has been making lower highs and lower lows. While we are still in a bullish range when it comes to momentum, things continue to look weak as buyers struggle to get their footing this month.

equity momentumS&P 500 60-Minute

Last week I noted that I would be watching the 1810 level as the first potential short-term resistance on the 60-minute chart of the S&P 500 ($SPX). It seems buyers were unable to hold above that level and price headed lower. We  did however close up the week with the RSI indicator above the traditional oversold level of 30 which is a positive sign. There’s not much support, but we can watch 1772.5 which is where the most recent shadows of the past few candles have hit. To see the up trend continue the 1782.5 level will need to break as buyers put in a higher high.

S&p 500 60minVolatility

The Volatility Index doesn’t get much discussion on the blog, but I do try to highlight it when we are near historical extremes. This isn’t the case this week but I still want to show the chart below, which is the ratio between the 1-month Volatility Index ($VIX) and the 3-month Volatility Index ($VXV). We can use this ratio to see where traders are placing their ‘fear’ bets, if you will. When the green histogram is rising we know that 1-month volatility is outpacing 3-month volatility as traders become more fearful of current market losses than 3 months out.

I’m not overly concerned with the relative performance as I am with the number itself. When the ratio gets above 1 the Vix ratio (i.e. its term structure) shifts from contango to backwardation (read more about the two here).  As you can see from the chart below, the term structure spends most of its time in contango, with further-dated contracts trading at a premium to front-dated contracts. When things shift to backwardation we know that traders are more fearful of the present than they are of the future. As the chart shows, this often happens near short-term bottoms in the equity market. Right now we are still in contango but the premium for the 3-month Vix has been dropping as the 1-month Vix rises in relative performance.

VIXLast Week’s Sector Performance

Last week’s sector performance was very interesting. As I mentioned in the first paragraph we closed the week in the red, however the sectors you’d expect to show strength aren’t the ones that actually did. The three strongest sectors last week were consumer discretionary (cyclicals), materials, and industrials. With health care being the laggard for the week followed by consumer staples – two defensive sectors. The selling that took place in the major indices was not severe and it did not resemble panic action, which helps explain why we didn’t see a large shift in ‘risk on’ ‘risk off’ sectors, but I’m still surprised where the strength came from last week.

sector weekYear-to-Date Sector Performance

With health care apparently taking the brunt of the selling last week we now have consumer discretionary (cyclicals) taking the lead as the strongest relative sector year-to-date.

sector ytdCommodities

We didn’t discuss commodities last week so I wanted to check back in with this struggling asset class. On a relative basis with the S&P 500, the commodities tracking ETF ($DBC) is positive for December (bottom panel of the chart). There is still much work to be done for commodities to return to an up trend, but it’s taken one step in the right direction on a relative performance basis. Looking at the price action of $DBC things don’t look as good. The RSI indicator hit resistance and turned lower with price unable to hold above its 50-day moving average. It appears commodities put in yet another lower high as the down trend continues.

CommodityMajor Events This Week

Financial commentary will be packed full of opinions surrounding the FOMC meeting on Wednesday and whether the Fed begins to taper it’s QE stimulus program. I personally don’t think the Fed announces the taper this month, but may provide a little more clarity to their future plans. Here’s what is scheduled to be announced this week that traders may want to keep an eye on:

Monday: Industrial Production
Tuesday: Consumer Price Index
Wednesday: Housing Starts, FOMC announcement
Thursday: Jobless Claims, Existing Home Sales
Friday: GDP

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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 Market Technical Outlook

This week I am starting something new with the blog. Each Monday morning I’ll be posting a series of charts that look at the big picture of major markets. Something I’ve personally been working on lately has been stepping back and not getting lost in the flood of information. These are also some of the charts I use in my firm’s weekly investment committee meeting and show a weekly market technical outlook. Hopefully this post each week helps you get a better idea of where the markets stand from a technical perspective and makes you better prepared for the week ahead.

Equity Trend

First up is the overall trend on a daily chart of the equity market via the S&P 500 ($SPX). For 2013 the trend has been positive with a few bouts of volatility along the way. The green dotted line on the chart below connects this year’s lows and helps identify the overall trend. I’ve also included the 20-day and 100-day moving averages. Depending on time horizon, these two MA’s have acted as support during recent down swings.

SP500 TrendEquity Breadth

Think of equity breadth as a measure of health for the up or down trend. As the S&P 500 ($SPX) rises we want to see strong participation. With that, there are multiple ways for us to measure participation or the health of the trend. First we’ll look at the cumulative number of advancing issues minus declining issues on the NYSE. When there are more stocks rising than falling this line will climb higher. Up until recently we had been seeing confirmation from the advance-decline line for the up trend in the S&P. The current slight divergence isn’t a red flag yet as it can be easily corrected. If the advance-decline line weakens further and begins making lower highs, then I’ll begin to grow more concerned.

On the bottom panel of the chart below we have the percentage of stocks above their 200-day moving average. It’s often thought that a stock is in an up trend when it’s above its 200-MA. We can use the percentage of stocks above their long-term moving average as another way to gauge market participation. This measure of market breadth has caused many traders to grow concerned about the strength of the currently rally, myself included, due to it’s deepening negative divergence from the equity market. While stocks make new highs, we aren’t seeing the same action in stocks above their 200-MA. However, the percentage has been making higher lows, which is constructive for the current rally. Currently I view market breadth as neutral with a slight positive bias.

Equity Breadth

Equity Momentum

There are three tools for measuring momentum that I like to use on a daily chart. The first is one I often use on the blog, the Relative Strength Index (RSI) which is in the top panel of the chart below. While we are seeing a slight negative divergence in the RSI, it is still firmly in a bullish range as previous periods of weakness in price have been unable to push the indicator into ‘oversold’ territory (below 30.) Next up is the MACD indicator. This indicator has been flattening out over the last few weeks, which is slightly worrisome. Finally, in the bottom panel of the chart is the Money Flow Index, which works like the RSI but incorporates volume. Despite the potential for a divergence, nothing quite concerning here.

equity momentumS&P 500 60-Minute Chart

To take a step further in looking under the hood of the equity market I like to watch a 60-minute chart of the S&P 500 ($SPX). What I’m looking for here are short-term levels of support and resistance as well as confirmation in measures of momentum. Right now, we have established support just above the 1800 level, as show by the dotted purple line. Looking at momentum, we have a slight divergence in the Relative Strength Index in the top panel of the chart. While the price action has headed higher, RSI has been making lower highs over the last two weeks. We are also not seeing confirmation in the MACD indicator, another measurement of momentum. I’ll be watching to see if the previously mentioned level of support holds up as well as the 50-1hr moving average.

SP 500 60minLast Week’s Sector Performance

Below is a chart of last week’s sector performance. Being a shortened holiday week, it’s not surprising we didn’t see much movement in the major S&P sectors. The leading two sectors were technology ($XLK) and consumer discretionary (Cyclicals $XLY) with energy ($XLE) being the worst performer.

Week perfYear-to-Date Sector Performance

For 2013 the leading sector has been health care ($XLV), followed by consumer discretionary ($XLY) and industrials ($XLI). The utility sector ($XLU) continues to show the weakest YTD performance.

YTD PerfBonds

To represent the bond market I’m using the iShares Aggregate Bond ETF ($AGG). We’ve seen some nice strength in bonds off the Sept. low, even in the face of a strong equity move. At the close of last week it seems $AGG is creating a wedge between its 200-day moving average and 50-day moving average. Things still look bullish for bonds but I’d like to see a breakout above the 200-MA.

bond trendInternational

Off the July low we had been seeing some relative performance strength out of the iShares EAFE Index ($EFA), as shown in the bottom panel of the chart below. However, domestic stocks have taken back the reigns and have been leading for the last month. Looking at the top panel of the chart, at the Relative Strength Index, we have some nice support just under 50 as buyers continue to step in to buy dips in $EFA. If price continues to rise I’ll be watching for potential resistance at the October high.


The commodity markets have just been awful this year. I highlighted one potential bright spot last week, but on a relative basis there hasn’t been much to like in commodities. The RSI indicator is approaching resistance as $DBC, a commodities tracking ETF, struggles to break above its 50-day moving average. The trend in commodities is firmly negative.

CommoditiesMajor Events This Week

While my focus is always on the price action, I think it’s important to know what major economic data announcements are approaching. Here’s a list of what’s being announced this week:

Monday: ISM Manufacturing
Tuesday: Motor Vehicle Sales
Wednesday: New Home Sales, ISM Non-Manufacturing, and Beige Book
Thursday:Jobless Claims and GDP
Friday: Non-Farm Payroll

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.