The continuous commodity index (CCI) recently hit an all-time high and has continued to make new highs. The energy and agriculture sectors have been red-hot. Two things concern us in regards to the CCI. First, the market has had a single 8% pullback in the last eight months. Other than that, no weakness for more than a few days at a time. Second, the market is trading well above the 300-day moving average. The top of the chart shows the market’s distance from its 300-day moving average.
Also, quite a bit of retail money has suddenly flowed into commodity-related shares. The chart below shows the assets in Rydex Energy Fund. About two months ago, assets in the fund were less than $50 million. Now, the total is $152 million.
Source: sentimentrader.com
We see similar action in Rydex’s Materials Fund. Assets in the fund have tripled in the last six months.
Source: sentimentrader.com
The only aberration is the precious metals sector. I don’t show the chart but assets in that fund declined about 50% since the end of December. Moreover, I recently wrote about how the speculative money in the futures market remains heavily long all commodities (ex gold and silver).
We are in a long-term bull market and I believe commodities as an asset class will heat up in the coming years. That being said, commodities are very overbought here and the risk/reward for new longs is unfavorable. I see an intermediate top in the coming weeks or months. I’d advise lightening up on long positions and perhaps using stops to protect profits. This is a volatile asset class and if you exercise patience and use volatility to your advantage, you will likely find a few excellent long opportunities per year. This is not one of the times.
No comments:
Post a Comment