Thursday, June 6, 2013

Commodities poised for revival

Yesterday's stock market selloff was an event that we haven't seen in some time, as major averages fell over 1% across the board - and globally. Nevertheless, I saw a glimmer of hope for the bulls, as commodities were performing well despite the carnage. If a deep cyclical sector like that is displaying rising relative strength, it suggests that the end of this correction may not be too far off.

Commodities unloved and washed out
Simply put, the commodities complex is unloved, washed out and showing signs of investor capitulation. The chart below from BoAML shows the aggregate large speculator (read: hedge fund) net position from the Commitment of Traders report in the CRB Index. Large speculators have liquidated their net long positions from a near crowded long level to net short. Moreover, readings are consistent where declines have halted in the past.

Here in Canada, the junior resource companies are beyond washed out. The chart below of the relative performance of the junior TSX Venture Index against the more senior TSX Composite is at all-time lows - and below the level of the capitulation lows seen following the Lehman Crisis.

Here in Vancouver, which is the heart of junior mining country, I personally know of scores of well-qualified people who are in the industry who are struggling with the difficult environment.

Green shoots
In the midst of this bleak landscape, I am seeing nascent signs of recovery for the sector. What is encouraging was the positive performance shown during yesterday's ugly selloff. One of the top recent performers has been industrial metals, which has:

  1. Rallied through a downtrend;
  2. Staged an upside breakout through a wedge; and
  3. Staged an upside breakout through a resistance level yesterday - which was impressive given the headwinds provided by the risk trade.

At the same time, gold seems to have made a temporary bottom and it's starting to grind upwards as the precious metal is displaying nascent upside strength.

I am watching carefully the Brent price, which is a better proxy for world oil prices, for signs of an upside breakout through a downtrend. We almost achieved the breakout yesterday, but not quite.

The relative performance of energy stocks against the market is starting to show positive relative strength, which is another early warning of shifting leadership.

Macro and market implications
While I understand that commodities and commodity related stocks are unloved, washed out and poised to rally. These combination of sold-out sentiment and early signs of rising relative strength are pointing to a recovery in these sectors.

From a macro perspective, the recovery of deep cyclical sectors like these are consistent with a relatively upbeat outlook for growth economic growth. In that case, the environment for equities is encouraging and any correction should be relatively shallow - barring any macro surprises,

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

1 comment:

Anonymous said...

I have been reading your posts daily and find your analysis compelling, informative and quite unique among the other bloggers I follow. I do find however that you are looking harder for green shoots in the commodities sector than may be warranted. If we are entering a possible deflationary or dis-inflationary phase then commodities may have merely led this and may have further to go. While sugar and coffee, to name a few, have fallen hard recently, WTI and Brent crude remain above 90 and 100 respectively. Crude stocks are way above there 5 year averages and in fact we have not had this much crude stocked up since 1931! Therefore I think the potential for much lower prices here is actually pretty good. Even the Bank of America chart you posted is interpreted with bullish bias, both by yourself and the analyst who created it. We are barely below the zero line and no where near excessive pessimism so you are looking for the trendline to hold. I think evidence points to the contrary, $90 oil is too much for the current market in light of stocks, inflation expectations and economic growth in my opinion. Having said that, the best thing about trading is someone must always have an opposing view for the market to function (if indded you can call today's QE fueled market a functioning one!). Good luck in your endeavors and keep up the excellent work its both informative and thought provoking.