Commodity Inflation is Hitting Speed Bump


Inflation has become a popular buzzword (and concern for investors), and the broad commodity rally is a big part of the inflation narrative. 

The headlines below reflect how the media sees the commodity/inflation development:

  • Commodity prices drive WPI inflation to 27-month high – Economic Times
  • Commodities hit highest since 2013 amid inflation concern – Bloomberg
  • Strategists pick commodities as a favorite way to play reflation – Bloomberg
  • Surging commodities feed concern over inflation – Business Insider
  • Investors should be prepared for biggest inflation scare since 1980s – Business Standard

Interestingly, whenever a rally has been strong enough to become a main story is also about the time when the rally tends to pause.

The March 14, 2021 Profit Radar Report included the following analysis regarding the commodity rally:

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The long-term CRB Reuters/Jeffries Commodity Index chart shows that the commodity complex is approaching a significant resistance cluster.

The short-term chart of the Invesco Commodity Index ETF (DBC), the corresponding ETF, outlines short-term support/resistance. According to Elliott Wave Theory, it’s possible to count the rally from the March 2020 low as 5 waves with an extended fifth wave. The RSI-35 divergence would fit. 

As mentioned previously, we expect the trend of rising commodities, due to shortages, to continue. A wave 2 pullback (once this smaller degree wave 5 is completed) would offer a welcome opportunity to buy. It may even be worth to short DBC as it moves closer to 18 (and if it maintains the bearish RSI-35 divergence). There are no good short commodity ETFs. DB Agriculture Short ETN (ADZ) captures agricultural commodities but is thinly traded.

Since the above analysis was published in the March 14 Profit Radar Report, DBC has already fallen as much as 6%.

Continuous updates are available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s evaluation of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. 

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Up Next: Quantitative EATING Program – Chocolate Shortage ETFs

Here’s a matter of national importance. Chocolate prices are on the rise. The world’s largest chocolate manufacturers warn that the world is running out of cocoa. Is it really true, or just hype?

Here is an issue of national importance: A chocolate shortage.

“The world could be heading toward a global shortage of chocolate” – Time
“Cocoa shortage worries chocolate lovers” – NBC News
“Worlds largest chocolate manufacturer warns of potential cocoa shortage” – The Independent
“Is a chocolate shortage on the way” – USA Today

The price of cocoa soared 67% from March 2013 to September 2014.

Mars, the makers of M&M’s and Snickers, announced in July it would raise prices by an average of 7%.

However, since September, cocoa prices have fallen 17%.

Is this drop an opportunity to invest in cocoa or is the cocoa shortage all hype?

There are legitimate reasons for cocoa demand to outstrip supply:

  • Dry weather in West Africa. Africa is responsible for 70% of the world’s production
  • Deadly fungi like frosty pod and witches’ broom
  • A growing taste for chocolate by emerging countries
  • Ebola

We’ve seen a number of commodity ‘shortages’ in recent years. There was corn (ethanol as alternative fuel source) and wheat. Both are trading at or near multi-year lows today.

Based on the current media hype, I wouldn’t be surprised to see a bit more cocoa weakness.

The chart says that cocoa prices need to exceed 2,845 (that’s $2,845 a ton) and the descending red trend line to break the most recent down trend.

There are two cocoa ETF/ETNs:

  • iPath Dow Jones-AIG Cocoa Total Return Sub-Index ETF (NYSEArca: NIB)
  • iPath Pure Beta Cocoa (NYSEArca: CHOC)

Perhaps the Federal Reserve will unleash a quantitative eating program to increase liquidity. After all, Wall Street is a big consumer of cocoa, especially around the holidays.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Wal-Mart of ETF Providers Offers Most Bang for The Buck

 

Wal-Mart is known for rigorous pricing, swallowing up market share and frustrating competition. The Wal-Mart of the ETF market place is going about business almost the same way, but this Wal-mart can’t offer everything.

The ETF market place offers many exotic choices, such as a Global Carbon ETF, Forensic Accounting ETF, and IPO ETF, but that’s not what makes ETFs attractive and efficient.

Yes, BMW may build an electric car, but their flagship product is the ultimate driving machine.

The flagship ETF product is a plain and simple index ETF. Who builds the best index ETF?

2013 Index ETF Inflows

Since 2010, Vanguards index ETF market share has grown from 15 to 20% while iShares (owned by BlackRock) and State Street bemoan small losses (datasource: Bloomberg).

In 2013 Vanguard ETFs grew by $51 billion, receiving 32 cents of every dollar invested.

Index ETF Fees

The average Vanguard ETF has an expense ratio of 0.14%, compared with 0.35% for State Street’s SPDRs and 0.39% for iShares’ ETFs.

This is not a true apples to apples fee comparison, as State Street and iShares offer some more specialized ETFs with higher fees.

What about the most popular S&P 500 ETF?

The bellwether SPDR S&P 500 ETF (NYSEArca: SPY) has an expense ratio of 0.11%. The iShares Core S&P 500 ETF (NYSEArca: IVV) comes in at 0.07%, while the Vanguard S&P 500 ETF (NYSEArca: VOO) has a price tag of 0.05%.

ETF Holdings

As per its patent, Vanguard is able to pool mutual fund and ETF assets and issue different shares (such as ETF).

As a result, Vanguard ETFs provide a more pure representation of the underlying index. On average, iShares ETF hold 312 securities, State Street ETFs 308, and Vanguard ETFs 1,171.

Unlike iShares and BlackRock, Vanguard is not a publicly traded company and doesn’t have to worry about pleasing Wall Street.

It All Doesn’t Matter, if …

… you buy at the wrong time.

Even if you have the best-in-class product, you will still lose money if you buy at the wrong time. Neither State Street, nor iShares or Vanguard will tell you when to buy (chances are any advisor will always tell you now is the best time to buy).

When is the right time to buy? Here are a few tips.

Buy Low, Sell High – How to Spot the Best S&P 500 Entry Points

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. We are accountable for our work, because we track every recommendation (see track record below).

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

 

Weekly ETF SPY: Lumber Prices and Lumber Related ETFs

At first glance you probably won’t be interested in lumber and lumber prices. But, you should know that lumber prices have a good track record of foretelling what’s next for the real estate market. According to lumber prices, the real estate market is in for a roller coaster ride.

Back in October 2012, March 2013, and May 2013 we used lumber prices as a leading indicator for real estate prices (article listed below):

How to Turn the S&P/Case-Shiller Home Price Index into a Forward-Looking Indicator

Leading Indicator Projects Still Higher Real Estate Prices

Is the Housing and Real Estate Recovery Here to Stay?

Using lumber as a forward-looking indicator for the real estate sector has proven quite accurate, so it makes sense to look at what lumber prices are up to now.

Earlier this year lumber futures soared to $411.50 for on-track mill delivery of 110,000 board feet of random length 8-foot to 20-foot 2×4 inch pieces.

March 14, 2013 marked a significant peak and prices have fallen as much as 32.8%.

As outlined by the above-mentioned articles, lumber prices precede real estate prices by 12 – 15 months. In other words, forwarding lumber prices by 12 – 15 months allows us to roughly gauge what’s next for real estate.

Based on this observation (click here for a side-by-side comparison of lumber and real estate prices), real estate prices have a rocky road ahead (see chart below).

What’s next for lumber prices?

The chart below shows that there was no bullish RSI divergence at the most recent low. This suggests that the current rally is a counter trend.

Resistance is provided by the red lines. Prices are already above the two lower lines so a deeper retracement of the recent decline is possible.

It appears that ultimately lower prices are ahead for lumber, which will eventually (with a 12 – 15 month lag) be bad news for real estate.

There are two lumber-related ETFs:

iShares S&P Global Timber & Forestry Index Fund (WOOD)
Guggenheim Timber Index ETF (CUT)

Neither CUT nor WOOD track the actual price of lumber, but follow indexes composed of timber companies or firms that are in the timber trade.

Oil Flash Crash Erases 3.8% in 4 Minutes – Is This a Sell Signal?

Wall Street traders returning from lunch saw one of the most pronounced mini flash crashes in history. Within a matter of 4 minutes (between 1:51 –  1:54 pm EST) crude oil prices dropped 3.9%. The day’s trading range was 4.9%.

The swings were equally dramatic in oil related ETFs like the United States Oil ETF (USO) and iPath S&P GSCI Crude Oil ETN (OIL). The ripple effects were also felt in the broader PowerShares DB Commodity Index ETF (DBC) and iShares S&P GSCI Commodity Index ETF (GSG).

What caused this mini flash crash and is this a sell signal for oil?

What Caused the Sudden Drop?

Traders, analysts and regulators are still fishing for reasons, but there are only speculations thus far. An incorrectly entered trade (“fat finger error”) or rumors of a possible release of oil by the United States strategic reserves are possible suspects.

Is this A sell Signal?

Oil is not one of the asset classes regularly covered by the Profit Radar Report, but we can apply the same technical analysis methods used for the S&P 500, gold, silver, currency and Treasuries to oil.

The chart below plots crude oil futures prices against the 20 and 200-day moving average, prior support/resistance levels and a largely unknown but effective indicator called percentR.

We see that Monday’s quick dip pulled oil prices briefly below the 20 and 200-day SMA, which converged at around 96.50. Prices found support at 95 (green line), which is an area that buoyed oil prices several times before.

In addition, Monday’s drop triggered a bullish percentR low-risk entry. Only a close below 94.65 would negate the bullish low-risk entry.

Obviously, most asset classes are overbought due to last week’s Federal Reserve induced price pop and due for a correction. However, as long as oil prices stay above support at 94.65 – 95 any correction will have to wait.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.

Using Asset Class Correlations to Predict Stock Market Moves

Every day about a billion shares of stocks exchange hands on the New York Stock Exchange , but stocks are not the only asset class on the planet. Currencies and bonds are part of the same financial eco system, and we shouldn’t ignore their effect on stocks.

There’s a Bavarian saying that encourages people to “look beyond the edge of their own plate.” Translated in investment terms this means to expand your horizon and look at more than just one asset class.

Several times over the last couple of months the S&P 500  (SPY) has been declared “dead”. In fact, a recent CNBC headline said that: “Bill Gross is latest to join ‘stocks are dead’ club.”

The Fed could have jolted the S&P back to life with a dose of QE3, but decided not to. Against all odds, rather than rolling over, stocks have sprung back to life – a case of “dead man walking.”

On July 25, with the S&P trading as low as 1,331, a special Profit Radar Report outlined why stocks are not ready to decline just yet.

The key to this bold forecast was found in the correlation between various asset classes. Below are excerpts from the special July 25 Profit Radar Report.

July 25, Special Report: Asset Class Correlations

Some asset classes boom while others bust and vice versa. For example, bond prices typically rise when stock prices fall. Those types of asset class correlations should be taken into consideration for any market forecast.

Individual outlook for long-term Treasuries: Long-term T’s are butting up against long-term resistance while relative strength (RSI) is lacking price. This suggests that long-term Treasuries are in the process of topping out. Falling Treasury prices typically means rising stock prices.

Individual outlook for the euro: The euro has been trending down since March 2008 and is currently trading just above the June 2010 low. Although euro prices dropped below the June 1, 2012 low, RSI is solidly above the June 1 low. This suggests that the euro is trying to find a bottom that lasts for more than just a few days. Any bounce could gather steam if the euro is able to move above resistance. A strengthening euro is usually good for stocks.

What this means for stocks: If the euro rallies and long-term Treasuries decline, stocks should move higher or at least have a hard time declining.

The chart below shows how the iShares Barclays 20+ Treasury Bond ETF  (TLT) and Currency Euro Trust (FXE) perform during times when the S&P is in an extended up or down trend.

With Treasuries near a top and the euro near a bottom, stocks should rally or at the very least have a hard time declining.

Sentiment Picture – Stocks are Not Ripe for a Prolonged Decline

Sentiment readings have sent conflicting messages. The VIX is near danger levels for the S&P 500 while the AAII crowd is almost record bearish (which is bullish for stocks). Here’s the current sentiment picture and what to make of it.

Investor sentiment is closely related to money flow and therefore an important indicator. How is sentiment related to money/cash flow overall liquidity?

Investor sentiment tells us how investors feel about stocks. If they are bullish, we assume that they own stocks. If bullishness reaches an extreme, we know there’s not much more cash left for buying.

If investors are bearish we assume they are sitting on a mountain of cash. The cash will go to work eventually and drive stocks up.

There are different ways to measure investor sentiment.

The CBOE Volatility Index (VIX) uses S&P 500 index options and projects the market’s expectation of 30-day volatility. Readings around 16 or below are indicative of investor complacency and tend to result in an up tick of volatility and lower stock prices.

The Equity Put/Call Ratio represents a proportion between all put and call options purchased on any given day. A low put/call ratio means that investors are buying more calls than puts. This is a reflection of bullish sentiment; therefore readings around 0.6 tend to coincide with market tops.

A high put/call ratio means that investors are buying more puts than calls. This is indicative of fear. Readings of 0.9 tend to occur at the end of down trends.

The sentiment survey conducted by the American Association for Individual Investors (AAII) reflects how individual investors feel about stocks: bullish, bearish or neutral.

Investors Intelligence (II) polls investment advisors and newsletter writers. Their opinions are categorized as bullish, bearish and correction.

There are other sentiment and cash flow measures, but those four offer a balanced few of sentiment.

The Profit Radar Report always monitors sentiment and publishes a detailed sentiment report at least once a month. The chart below was published (available to subscribers only) on July 20, 2012.

The VIX was trading below 16 (bearish for stocks) while AAII investors were extremely bearish (bullish for stocks). II investment advisors on the other hand were becoming more bullish as the AAII crowd turned bearish.

Unfortunately, sentiment did not provide a clear signal then (it still doesn’t), but it showed a) that stocks may not be able to decline for good and b) that there was no high probability trade set up. This prevented investors from making trades they might regret afterwards. Based purely on sentiment, choppy market action may continue.

 

Federal Reserve and ECB Spent $3.5 Trillion, But Economy Remains Flat

There’s much talk about QE3. What would QE3 do for stocks and the economy? Since 2007 the Federal Reserve and European Central Bank (ECB) spent about $3.5 trillion on various stimulus packages. This has kept the S&P 500 afloat while economic activity is deteriorating.

I was going to start this article out with a bunch of sobering stats … but decided to go with a cartoon instead. A few pen strokes by a capable artist may explain the situation better than an avalanche of numbers. Here it is:

We are all familiar with the term “house of cards” and its implication. For illustration purposes, let’s assume we’re dealing with a number of card houses. What’s curious is that most of them are falling apart while one of them is still standing.

This house of cards is not separated from the others or protected by a draft, but it keeps standing as if it’s best buds with a glue gun.

It’s The Glue Gun

It’s amazing what can be fixed with a glue gun. My wife’s favorite “household appliance” is her trusted glue gun. It comes out whenever something’s on the fritz or “beyond fritzed.”

My wife isn’t the only one to like her glue gun, central banks around the world, particularly the Federal Reserve and European Central Bank (ECB), love their (glue) guns and they’re sticking to them.

In fact, their glue gun – printing money – has become a sort of addiction. Without “sniffing glue,” the economies just can’t survive.  How do we know that?

Now would be a good time to pull out some charts and data. The chart below compares the performance of the S&P 500 (SPY) with economic activity and the balance sheets of the Federal Reserve and ECB.

Rather than listing economic activity individually, the chart shows the Weekly Leading Index (WLI) published by the Economic Cycle Research Institute (ECRI).

The ECRI WLI is a proprietary index that combines multiple data points including unemployment, CPI, PPI, mortgage applications, etc.

The chart is almost self-explanatory, but let’s just highlight the obvious anomalies.

The S&P has been going up (green arrow). The ECRI WLI – meaning broad economic activity – has been going down. Why?

The balance sheets (glue guns) of the Federal Reserve and ECB glued the system together when it was falling apart. The ECB’s liabilities are close to $4 trillion, the Federal Reserves’ about $2.6 trillion.

The stock market thus far is enamored by the glue gun approach, but the economy’s saying that the glue gun isn’t working. Something’s gotta give. I think it will be the stock market.

The Dow – The Most Popular and Most Flawed Index in the World?

Trick question: Is the Dow Jones Industrial Average (tracked by the Dow Diamonds ETF – DIA) the most widely recognized stock market index in the world? No, technically it isn’t. Here’s why and what makes the Dow the most flawed “index” on Wall Street.

If you’ve ever come across the word “charming” in a for rent or for sale listing, you probably know it’s code for “unique in an old and antiquated kind of way.”

You know what else is charming? The Dow Jones Industrial Average (DJIA). The Dow is the dinosaur among market indexes in more ways than just longevity.

Unlike other market cap weighted indexes like the S&P 500, Russell 1000 and Nasdaq, the Dow is price weighted. It should therefore be considered an average not an index.

Old World Charm Meets Wall Street

The value of the DJIA could literally be calculated with just pen and paper by adding up the share prices of its components and multiplying the sum by 7.58 (or dividing the sum by 0.132). 7.58 (or 0.132) is the divisor used to keep the DJIA value constant.

Component stocks being price weighted means that the company with the highest stock price is the VIP. With a price tag of 191 that’s IBM. In fact, IBM is priced so much higher than its fellow Dow component stocks that it dominates the Dow’s performance with an 11.5% weighting.

To illustrate, let’s compare IBM with the Dow’s smallest component – Bank of America (BAC).

Earlier this year BAC gained as much at 81%. This impressive gain added a whole 35 points to the Dow’s performance. The same gain in IBM would have propelled the Dow by 1,130 points.

Price Weighted vs. Market Cap Weighted

The deeper you dig the more intriguing the Dow’s weighting structure becomes. Here are a few more factoids:

The top five price weighted DJIA stocks account for about 34% of the index, while the bottom five have a combined 5% weighting. The same top five stocks account for only 18% of the market cap while the bottom five account for 11%.

IBM has about 10 times the weighting of GE but only about 25% more market capitalization.

The chart below makes it easy to dig up more anomalies (if you so choose). The chart shows the Dow’s components sorted by their price weighting (blue columns) contrasted by their market cap weight (dotted black column).

Know Thy Index (or Average)

The Dow’s performance is pretty much in line with that of the S&P or Russell 1000, so what’s the fuss about the Dow’s anomalies?

Investors should be aware of any one stock dominating an index they own. IBM makes up 11.5% of the Dow and Apple accounts for 20% of the Nasdaq-100. If you own any of those lopsided indexes you should watch its key components more than just peripherally.

There will be a time when a major component will provide a strong buy or sell signal and odds are the index will move in the same direction as its alpha male.

If your goal is to assemble a balanced portfolio, there’s no need to own the Dow Diamonds (DIA) and IBM shares, or the Nasdaq (QQQ) and Apple shares.

And even if any of the above information doesn’t affect you or your style of investing/trading at all, you’ve just learned something that probably fewer than 1 out of 10 investors know.

Seasonal Forces Suggest Soft Stock Prices Followed by Rally

Seasonality-based investing has experienced somewhat of a renaissance. Seasonality is based on decade-old patterns, which some consider archaic, while others point to the success of seasonal signals. Regardless of your bias, here’s what seasonal patterns suggest for stocks in the near future

“Red sky at night, sailor’s delight; Red sky at morning, sailor take warning.”

“If twice rotates the weather vane, its indicating wind and rain.”

Farmers are dependent on weather to grow their crop. Decades of watching weather patterns have resulted in folk wisdom such as quoted above. Decades of watching stock market performance has yielded Wall Street folk wisdom (if you can use Wall Street and wisdom in one sentence) like: “Sell in May and go away,” “Santa Claus Rally,” “January Barometer” and others.

Seasonality does for market forecasters what weather patterns do for farmers and meteorologists. They are valuable but not infallible.

Mid-year Seasonality Check

This article will take a look at how the S&P 500 (SPY) has conformed to seasonal patterns thus far in 2012 and what the seasonal biases are for the rest of the year.

Before we look at seasonal biases, it’s good to point out that since 1950, the S&P (SPY) was up 46 out of 62 years (74%). Since 1970, the S&P (SPY) was up 32 out of 42 years (76%).

Therefore, averaged over decades, even seasonal rough spots like February, May, and September are reduced to average monthly losses of no more than half a percent.

The first chart plots the S&P 500 (SPY) against seasonality. The underlying data for seasonality is the average monthly performance of the S&P since 1950.

We see that “sell in May and go away” proved to be the right move, although the May correction was more pronounced than seasonal weakness suggested. Aside from perhaps a small summer rally (which may have come early in June), seasonality suggests soft prices until October followed by a year-end rally.

The second chart adds a twist to the generic seasonal pattern; it illustrates the S&P’s performance during election years.

One difference that makes election year seasonality stand out is a stronger than usual June – August period and a much weaker October (the weak October is largely due to the 16.9% loss in October 2008). September is the weak link in both patterns.

Seasonality Lessons

Some look at seasonality and say it’s worth as much as this piece of folk wisdom:

“If the rooster crows on the manure pile, the weather will change or stay a while.”

Others live (and die) by seasonal patterns. The right approach lies somewhere in between.

Seasonality for the remainder of the year suggests soft prices (but no big decline) in July and weakness going into September/October followed by a strong year-end rally.

High probability trading opportunities are ideally confirmed by seasonality (such as the May 2011 sell and October 2011 buy signal), but sometimes other market forces (sentiment, technicals, money flow) simply overpower seasonal biases.

Rather than focusing on one indicator, the Profit Radar Report takes a multi-dimensional approach to trading, which includes technicals, sentiment, seasonality, cash flow, fundamentals and yes, seasonal patterns.