Three fast moving commodity trades that may pause

If you have NOT been reading this blog for long – perhaps you didn’t “get the memo” back in the fall of 2020. That’s when I began pounding the table on the reflation trade. Back then, you could hardly find a bullish outlook for commodities. ValueTrend was taking the contrarian view by daring to buy those sunken ships.. Back then, it was all about green energy, technology, and growth stocks. And of course, that’s when green energy, technology and growth sectors peaked.

Now, everyone is talking about reflation, re-opening, and supply shortages. And of course, the reflation, re-opening and commodity trades are now overbought.  You may be tempted to join the herd by getting in on the reflation trade. If that is your mindset, this blog may help you understand the dynamics of that decision.

Today, I would like to look at three commodity trades that have worked out very well for you, if you have been following this blog.  Craig and I have been all over these sectors since late last summer and fall of 2020 – and I made no secret of those trades to my blog readers. Now, here is the new memo: We feel they are overbought. That said…our view remains that commodities should continue to profit later in the year.  But, they are likely to underperform for a while- so you might want to take that cycle into consideration for your own portfolio. Let’s get to work…

Oil Producers

The Oil producers index chart below suggests that the sector is coming into major resistance. That, as it nears the lower part of its longer termed trading range (former support) in the mid-500’s. Given the seasonal weakness for energy over the summer, and the strong technical resistance at the current moment, I’d anticipate some back n’ fill (sideways) action on the sector for the coming months. Longer term, the chart shows a bullish bottoming pattern.  The fundamentals behind reflation (I was talking about buying oil back in the fall when oil was trading in the $40’s – now mid-$60’s), suggests a renewed level of strength. I feel the next leg up on oil is likely after the seasonal weak period for energy this summer.  At ValueTrend, we recently sold some of our energy, keeping only the very best looking charts, with a bias towards retaining the high dividend payers. Like the pipelines, discussed here.

 

 

Metals

Like oil, ValueTrend jumped on the metals back in the early fall when prices were low, and most investors were fixated on technology, green energy and stay-at-home stocks. Ever the contrarians, our indicators suggested this was another trade to get into when the herd was looking elsewhere.

Six months later, the sector has blown through resistance – and is quite overbought. As we did with energy, we recently reduced, not eliminate, our exposure to the sector. We continue to hold some exposure through a dividend paying stock and an ETF. We anticipate a pullback or sideways pattern over the summer in the sector, which should provide opportunity to add-back to our positions. The XME ETF chart below illustrates an overbought pattern, but the breakout to new highs is bullish. This pattern suggests that, so long as the pullback does not break its past peak near $40, the ETF (and sector) remains bullish. Like oil, we anticipate the reflation trade to remain valid. It just needs to take an overbought pause.

 

 

Agricultures

A poster-boy stock for the agricultural commodities is Mosaic (MOS-N). I posted a video on the commodity charts recently – which is available here. I’d encourage you to watch it if you want to get a handle on opportunities vs. not-so-opportunistic reflation-trades within the commodity space. One of the observations I made was that the “softs” (agricultural stocks) may be setting up for some opportunistic moves. While its hard to trade an individual stock that focuses on one agricultural product (eg. cotton), you can cover the gambit by owning fertilizer companies. And MOS is the big one.

The MOS chart is hitting long termed resistance right now. Its likely to stay flat for a while, as I suggested with energy. Back n’ fill. However, there are enough fundamental reasons for a potential breakout through those highs at some point. We don’t hold MOS, but we bought a competing fertilizer stock with an identical chart pattern. Our view is to hold our fertilizer position and collect a dividend over the summer. It may be less profitable to enter the sector now if you don’t already hold it. You may want to keep an eye on the chart and buy if it can maintain its recent attempt to break $35 for a few weeks. Bullish breakouts can end up making strong moves. My guess is that this stock, and the sector, will take a while to materially break out. It may even pull back enough to offer another entry point. It’s worth watching for either a breakout or a pullback if you have a longer view.

 

How to identify overbought markets, and how to sell before its too late

I just finished recording a two- part video that may be of interest to readers interested in learning how to identify and manage market risk. I am calling the video’s “You can’t predict, you can prepare” after the famous advice by investment icon Howard Marks. Please visit our video page here to access these videos. One will be posted this week, and the other will be available next week.  You can also subscribe to the videos on that page to ensure you do not miss future content.

It is my opinion that stock and housing markets are in a bubble – as outlined in this blog. That said, we do not know when those bubbles will pop. Please see my recent blog on a lesson I learned in the late 1990’s. Ideally, we want to stay with the trend until it ends. These video’s will offer suggestions on how to accomplish this goal.

Video #1 will look at identifying an overbought market

Video #2 presents the basics of understanding how to avoid selling before that overbought market completes its top. It goes on to offer the basics of creating a sell rule to help you exit after the trend ends.

NOTE: I will be unavailable for a few days this week. I will not be able to post a second blog or respond to your comments on this blog. Hopefully by Friday I will be able to address any comments posted. Thanks for your patience.

5 Comments

  • Hi Keith. Do you have a view on the lumber stocks/industry? I imagine you view these similarly to the other commodities which have run fast and hard for a while now, but I think that lumber has gone even more parabolic than the metals. I’m looking to re-enter some of our marvellous Canadian stocks in this space over the summer because (as you’ve often noted) many TSX-listed securities are cheap compared to their US counterparts. For example, even after doubling in a year, West Fraser is still selling at 5 times trailing (if you’ll forgive my referring to the funnies). Any chance you could do a blog on the technicals for lumber in the future? Thanks for sharing so much valuable insight with your readers.

    Reply
    • Thanks Paula
      Its probably not worth me doing and entire blog on lumber/ lumber stocks – but the bottom line is that these stocks and the underlying commodity acted like some of the other commodities noted (metals, fertilizers) in that they got mega-overbought. Now they are pulling back as we expected. However, new breakouts through old highs are typically bullish in the longer run. So I will assume that lumber/ related stocks will face a similar summer as the other commodities – go sideways or retreat a bit–then find their feet again in the fall and move on within a bullish trend.

      Reply
  • Seems to me Gold may be the contrarian play within the commodities sector as it peaked summer of 2020 while the other commodities were basing. It now seems to be resuming an uptrend where other commodities are correcting.
    Your comments?

    Reply

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