Remember Commodities?

From where I’m sitting, it seems like commodities aren’t getting any attention. I remember a time, not too long ago, where Oil, Gold, Copper and the agricultural commodities were the talk of the town. What led to that? A 10 year rally in the asset class off the lows in 2001. What led to no one caring anymore? Three years of declines since the highs in Spring of 2011. It’s really that simple.

So now that we can see nobody cares about commodities, it’s probably in our best interest to not only care, but really take a good look at them. Today we’re looking at the Continuous Commodity Index put out by Thomson Reuters. I prefer this particular index because it’s an equal weighted composite of 17 commodities. So rather than obnoxiously over-weighting Energy like a lot of other commodity indices, $CCI weights each of them at 5.88% per component.

1-23-14 CCI componentsEnergy represents 18%, Metals are 24%, Softs are 29% and the Ags are 29%.

This is a daily chart of the $CCI going back to the 2011 highs. It’s easy to see the very clear pattern of lower highs and lower lows. This is why the media doesn’t want to talk about it – it’s not sexy like Netflix and Herbalife. As market participants, we love that.

Look how prices of the commodity index have essentially stopped falling:

1-23-14 CCI daily

Not only is 500 big round number serving as a psychological area of support, but this price also represents exactly a 50% retracement of the rally off the 2008 lows up to 2011 highs. This price was also resistance throughout 2010 before the final explosion higher.

Here’s the most interesting part. As prices have been stabilizing at these levels since last year (which was also 2012 support), momentum has started to turn up. These are all signs of a potential bottom and imminent reversal higher.

Before getting ahead of ourselves, we need to see these 3-year downtrends taken out. If we start seeing prices above 530, which is just a few percentage points away, we’ll begin breaking those downtrend lines. But more importantly, it will mark the first higher high, which you need for an uptrend, by definition.

I think the prospects are high for this one. Nothing to act on aggressively at this point, but definitely something to watch develop throughout the rest of the first quarter.




Commodity Indices (ThomsonReuters)