I’ll be on vacation the rest of the week and will not be updating my blog. I’ll return with new posts Monday, June 1st. I may or may not update www.twitter.com/karleggerss
Have a great week.
For the past few years, I’ve monitored the correlation between commodities and interest rates measured by 10-year treasuries. In fact, I’ve published this picture many times on this blog. Going back, there had been a very tight correlation up until around the beginning of this decade. Then, it all changed.
The picture above is a graph going back to 1973 of interest rates in red vs. commodities in blue. The correlation broke in early 2002. This is easily explained because the emerging markets (especially China) began prospering and moving their new wealth into our bonds pushing down our rates. In turn, Americans had low interest rates for the whole decade to purchase many things on credit, especially goods produced in China. China got richer because of it and the circle was complete. Commodity prices rose as the emerging markets continued to prosper and rates stayed low. Everyone was happy.
The above situation seemed like it could go on forever. But, I continued to show this graph in speeches telling the audience that generally when you have a correlation this tight that temporarily breaks apart, just give it time and it will come back together. We knew at some point the red line (interest rates) would go up and/or the blue line (commodities) would come down. What we didn’t know is how quickly that gap would close. Well, it closed in a matter of just a few months. A painful drop for those long commodities and the companies in those businesses.
You can see from the updated chart above while still a gap, we’re more in a normal range. I suspect going forward with the constant printing of U.S. dollars that interest rates will continue to rise. In addition, commodity prices will continue to rise as well. So, don’t look for the gap to re-appear but simply both lines to move up over the next few years.
That means shorting U.S. treasuries and going long commodities. I would love if that was a buy and hold strategy but the easier trade of the gap closing is in the past. Now, it’s about other factors. You’ll have to trade around those positions but shorting treasuries and going long commodities is a nice longer term trade.
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Since early May, the stock market has been moving sideways and hasn’t really gone up or down despite a few volatile days. This is giving you an opportunity to adjust your portfolio or at least think about what you want your portfolio to look like if we do get that elusive pullback. It’s easier said than done, but basically, look at what people need and see if there enough of it. If there isn’t, you buy it because it’s going higher. That’s where we are with all kinds of agricultural commodities.
There continues to be a diminishing supply globally for sugar, soybeans, wheat, cotton, etc. At the same time, there’s global demand for all of these as more people around the world are eating better, wearing better clothes, drinking more coffee, etc. Also, some of the fields are being used for development as they industrialize so there aren’t as many places to grow some of the crops. In addition, some workers are leaving the fields and getting other jobs. All of that leads to less supply. Some of these commodities are already up 25% or more but they may have a long way to go. The Powershares DB Multi-SectorCommodity Trust Agriculture Fund (DBA) gets you long all the various agricultural commodities. It hasn’t kept up with alot of the commodities simply because it owns a basket and some of the commodities in the basket haven’t moved that much….yet. I think this ETF hasn’t even begun to move the way it will in the next few months.
In other commodity news, oil continues to move higher (over $60) along with gas prices (up 22 days in a row). Combine higher gas prices with the rise in ag commodities and that could really begin to hurt the improvement in the economy in the next few months. Keep an eye on that.
By the way, watch natural gas. I locked in some nice profits on natural gas last week but I’m looking for re-entry into UNG as long as it holds the 50-day moving average.
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That was the question posed to me on my radio show this morning by a caller. The futures were up about 1/2% before some economic data came out at 7:30 CST. Housing starts were supposed to be 520,000 for April based on estimates, up from 510,000 the previous month. Instead, housing starts fell and were actually 458,000.
The futures immediately sold off and the markets have been under a slight bit of pressure all day. Why would investors sell based on lower housing starts?
At first glance, you would say that it’s bad news because we want to see improving economic data every month. The bigger issue though is the fact that it’s the multiplier effect. If a house isn’t being built, then there isn’t a closing, there isn’t someone getting cable television hooked up, they aren’t buying a new refrigerator, they aren’t buying a new lawn mower, etc. It trickles down when a home is purchased.
Let’s take the contrarian view for a moment. Maybe this is postive news. We have an oversupply situation in this country regarding homes. There were too many built. There’s too much inventory. That’s going to take some time to work off. It doesn’t help the situation if for every empty home there is a new one being built down the street. Less supply, more demand equals higher prices. We’re working towards that and falling housing starts may not be that bad of a stat.
Hence, a stock market today going back and forth with no real direction.
The futures were up this morning when I saw the headline that the Congress Party in India had won the election. Many say this is the collapse of India’s once-powerful communist parties which could mean key reforms in insurance, pension funds, banking and retail. The iPath MSCI India ETN (INP) was already looking good technically before today but the election news caused a 24% rally today closing above $49 (its biggest one day gain ever). With that said, the old high was around $120 in early 2008, so still way off of its all-time highs. Two other ETFs that give you exposure to India are EPI & PIN in case you’re interested. Investors poured into India today because this is another step toward capitalism, something that seems to be disappearing in this country. The futures got another pop when Lowe’s announced reduced earnings and revenue but better than expected. I think that sounded good but that wasn’t the real story. I think the big money (institutional money) was buying U.S. equities based on the news in India. Take a fast growing population with tons of consumers to buy “stuff” and make it easier to sell them that stuff and there’s good reason why equities went up. I think this is great news.
The markets opened stronger and got stronger as the day went on. There were times it looked as though it was going to roll over but never did. There’s no doubt that the India news is great. But, let’s analyze the rally a little closer. Today’s rally was on very low volume and the internals while decent, weren’t spectacular. Chalk one up for the bulls nevertheless. Technically, I see that we’re now firmly in place between the 20-day moving average which is moving up and the 200-day moving average which is moving down. One will give way and very soon.
When you have some extra cash on the sidelines like I do right now, it’s hard to watch days like this. However, I’m not in the day trading business and I’m not interested in scalping gains. My goal is to make a reasonable return and protect principal. That means not getting caught up in the day to day gyrations. Don’t get me wrong, day trading can be fun but that’s not where I’ve made most of my money in my investing life. With all the vibration lately, the equity markets are at essentially the same place they were in early May. So, take a breath. Develop the game plan and stick with it. I’m keeping an eye on the leaders of the rally since March 9th to see if they hold up better on down days and continue leading on up days.
Today didn’t change my shorter term view that we may see lower equity prices but the India news makes me more bullish. It’s not a game changer but it certainly helps.
Fox Business Network
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Just a note to let you know that I’ll be on Fox Business this morning at 7:40 a.m. CST.
“Buy!” ”Sell!” ”Generational lows: Great opportunity!” ”Wild inflation!” ”Bear market forever!” Which one is it? I’d say prepare for all of them. There are too many variables to make a prediction on what the world will look like in 10, 20, or 30 years. This is why we trade. This is why I believe in trading. Emotions get the best of investors from time to time and take stock prices way too low. Sometimes they take them way too high. Shares of stock are never perfectly valued. They fluctuate. Remember the 1990s and how easy it was to make money. Think back and you’ll remember how easy it was. It’s never supposed to be that easy. Investing takes work. You need to study the investment, the investors, the political climate, the economy not only in the U.S. but around the world. There are so many things to take into consideration. But, there in lies the opportunities. Many people don’t do the homework or dedicate the time like you do. They just blindly throw their money into investments because it seems like the thing to do. Or, they may do it because they saw someone on television say that’s the thing to do. Those people are always there for you and me to take advantage of in those situations. Greedy people need to be sold to and frightened people need to be bought from.
My goal with this blog is to combine the fundamentals with the technicals and let you in on what I see and what I think can move and make you money. As I wrote last night, we don’t have rules on how long to hold things. We can make mistakes and undo them very quickly. We can take profits quickly as well. Or, when the time is right, we can make an investment that we can keep for several years. We’re at an important place right now because I believe the easy money has been made for this rally. The massive oversold rally is now being tested. For the first time since March 9th, the rally is in question. Yes, many have questioned it but even the bulls are a little concerned. You can see from the chart below that the S&P 500 now firmly has a double top in place that many technicians will look at as a potential problem.
In addition, the 200-day moving average is there staring us in the face. Add to that all the uptrends that were broken this week besides the price levels on the indices including the advance/decline line and the uptrend for net points gained. Many people believe this technical stuff is just a bunch of malarky. You know what though? Lots of people look at the same charts you and I do. It becomes a self fulfilling prophecy and that’s why it works. Trust me, the fundamentals didn’t work very well in 2008. Those “value” guys are out of jobs right now. We all got hurt last year with the meltdown but those that were diversified into high quality bonds, private equity, cash, and were more active on the trading side were the ones that are still around.
Now that all these uptrends have been broken, what’s our next move? Mine has been to raise more cash and wait. I sold a lot this week including my holdings in Natural gas. This rolling over almost seems too obvious. Every indicator in the world I watch tells me that we’re going down much more. But, because it’s so obvious, I have to respect the fact that this may be all there is to this sell off. So, as I wrote last night, be flexible and be prepared for more gains. I just don’t want to be the first one to make a move.
Television
I’ll be on Fox Business Monday morning at 7:40 CST.
Biz Radio
Just a reminder that my daily radio show, “Through A Trader’s Eyes with Karl Eggerss” will be moving to the 8 a.m. CST time slot starting Monday in Houston, Dallas, & San Antonio. If you’re not in one of those cities, you can stream it live on www.bizradio.com or listen to the podcasts on the right of this page.
Have a nice weekend.
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After a nasty day where over 90% of the volume was down volume, you’d expect a rebound rally. Well, we got it today. A horrible day yesterday and like bouncing a ball off of a building, it bounced some of the way back up. For a while, it looked like we’d get some substantial gains but sellers came in during the last 30 minutes. Keep in mind that the bulls out of it yet though. The uptrend is still intact but I’m still a seller, not a buyer. If you are one of those bulls, I’d shift your time frame out a bit maybe a few weeks. Give the market maybe a month or so to pullback. Then, I think a lot of what worked during March & April will work again. Scarce resources and emerging markets will once again rise. In the meantime, build your shopping list of the positions you didn’t own during the rally but wished you did. Or, better yet, look to re-enter the positions you’ve been selling lately. Too often, investors sell a position and move on to something else. Follow your old positions and look to re-enter them at more attractive prices. All stocks have rhythms. The more you get to know that stock and the way it trades, the more money you can make with it.
I think this is also a time we can reassess our portfolios and upgrade them. For example, I owned a mutual fund that invested in opportunistic chinese companies but didn’t perform as well as a closed end Chinese fund. Yesterday, I took profits on that Chinese fund and once we get a better entry point, I’ll upgrade by purchasing the closed end fund I really want at lower prices.
Always remember, you have much more flexibility than a lot of professional money managers. Take advantage of that and use it to your advantage. This market is begging you to do that.
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