Ironically in this "buy the carnage" environment, I'm going out on a limb and saying we should be due for an oversold bounce in commodities soon. After the prescient call in oil in late June made us 6 for 6 on major turning points (not that it helped us escape the carnage) [Jun 26: Can a Near Term Top in Oil be Far Away?] I'm going with the group think that $110 or at worst $100 should provide an intermediate floor in oil. And with that the panic will subside (for a while at least) in all commodities.
Other reasons? First, only 1 person emailed me today to ask if I was buying fertilizer. So most people have given up :) always a good (anecdotal sign). Second, we are starting to see the complete opposite of what we saw 2 months ago - (then) commodity price going up but stocks not following (oil/natural gas) (today) commodity price going down but stocks not being decimated. And the coal prices and fertilizer prices simply are not going down; so unlike natural gas down 40%, and oil down 20% - these have been the babies out with bathwater. But fundamentals don't matter - only quant hedge funds programmed trading. But that will end at some point and the hordes will scurry back. At least for a trade so they can goose their quarter. Now with that said, the charts are gosh awful in some... err many.... err most cases, so we'll see how sustained the rally is. Last point? Valuation. Mosaic (MOS) now trades at just over 6x May 2009 earnings. But they say in commodity land, sell when valuations are cheap and buy when they're expensive, so one could explain that away too. Maybe when Mosaic starts trading at 2x May 2010 earnings we can sell even more - because it will be even cheaper ;) But we do see some charts that appear to be bottoming - could it be Mosiac (MOS) made the 2nd part of a double bottom today? Too soon to tell.
And Sunday night in our weekly summary
I also have lack of conviction in any 1 sector so we're spreading our stakes over many sectors. That said, we've had a 2 month dismantling of the commodity sector and since they are no different then banks, retailers or homebuilders at this point; those groups had significant rebounds during the past year even when their fundamentals were deteriorating - so even if one believes the fundamentals are deteriorating at some point the market punishes the "crowded" trade - which at this point is sell off commodities. Maybe it won't be this week but my hunch is we are near to a bounce in the group. The question is how long will it last - but with broken charts everywhere we'll be selling into any bounce and if we are "wrong" and this is just step 1 of a much larger move up, we'll buy back positions as they show strength.
.... that in this market where you buy the beaten down and sell the strength, this 2 month hammering in commodities looked to be showing signs last week of relenting, and I felt a bounce could be in the offing. So far this week that been a good call as we are seeing some good action. But the open question is sustainability. Do you sell the bounce or buy the bounce? I don't know. My initial plan is to sell the bounce and if things continue upward to rebuy - since these moves can have some legs once HAL 9000 decides he loves commodities again. But do we expect a fundamentally driven move upward over a sustained period? Not anymore. Not in this market. Every stock, regardless of sector is the "same" - buy when oversold, sell into overbought - no moves last for more than 2 months.
I am using 2 charts as my proxies - in my 2 favorite commodity groups - Mosaic (MOS) in fertilizer and Walter Industries (WLT) in coal. Both are neither the worst or best chart in their group, and both have broken down below their 50 day moving average but then began to trade sideways. Now both are making runs at their 50 day moving average from below, and I'd like to see both close ABOVE and then make a confirmation day (a following day with a higher close/high) and then we can get sort of happy about this sector. But I would not expect any 3 month rallies.
Further if the market begins to break down action (not saying it will) will these stocks move in inverse relationship? Or will we finally reach that point where everything is sold at once instead of a sector by sector woodshedding action. All open questions - but those are my thoughts going forward. But once again, we seem to be in a place where the hardest hit gets the rotational money - the name of the stocks/sector mean little in this era - they are all the same to computers. These are not a fundamental investor's thoughts; these are a trader's thoughts. Because long term investors who use fundamentals as a basis for buying are being bludgeoned in this era.
So I'll be interested to see if we have the complete opposite trade - consumer discretionary/financial = bad, commodity = good. You know, caveman trading logic: "This stock good.. grunt. Beaten down. grunt. Me like. Me Buy. grunt. Retailer is last week trade. grunt. I sell. Technology? Not in caveman days."
Look for Jim Cramer to come on TV if this move lasts for a few more days saying "I want you in commodities - the move downward was overdone" ;) I'm still doubting the move will be sustained but I am sort of hoping for it to see if this prediction will come true.
Long Walter Industries, Mosaic in fund; long Mosaic in personal account
4 comments:
I got lucky and nailed the bottom in oil at 111.34 last Friday. I wrote about it here:
http://lcmarket.blogspot.com/2008/08/trading-idea-long-crude-oil.html
At the time, I thought it rather peculiar that the Georgia Russian conflict made so little noise despite that Russia supplies a large portion of the EU's energy needs.
Good job
When I first read it I thought you wrote you nailed it at 11:34 last Friday and I was thinking: man, must be quite an alert system to be that accurate
I still am not sold yet on any real reversal but its a nice 2 days out of purgatory.
TM:
Hi there!
This past week in my newsletter I highlighted the fact that gold's pullback was a 50% retrace of the prior big move right to support; it isn't a bear market yet for gold and I am a little skeptical of the dollar's strength in the face of weakening fundamentals.
Same goes for crude; I still see this as a pullback within a bull market; for both crude and gold I think we are in extended ranges over the next 12-18 months until the next bull market in equities when commodities will lead again.
Of note, insiders at energy companies as well as metal companies are buying their shares to an extreme degree. This isn't always perfect as insiders at financials were buying en masse at the top over 12 months ago, but I would rather have insiders buying on pullbacks than not.
My guess is that this is not a bounce to new highs but to establish the upper end of the range.
Love the "caveman" paragraph. Almost fell off the chair.
This is not a market, in which, one can find sustained logic. Hal9000 just wants to ride the sine wave up and down. Hal9000 doesn't care about the peak to trough distance of the sine wave.
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