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Why commodities could be heading for an upturn
Markets are intertwined like never before, with commodity prices following stocks ever lower. Oil, gas, gold and silver have all touched new lows for the year. So are they approaching a bottom?
Never has there been a time where the stock market has influenced the commodities markets so much. Last time I checked, the price of soybeans, cocoa or orange juice had absolutely no relationship to whether Microsoft (Nasdaq:MSFT), Disney (NYSE:DIS), or Google (Nasdaq:GOOG) declined in price.
But these days, we've got a serious blurring of the lines between global marketplaces. In addition, the prevalence and ease of electronic trading, coupled with well-capitalised hedge funds, means we're seeing all kinds of different markets having an affect on one another.
Not so long ago, it used to be that money typically flowed from one asset class to another - for example, from stocks to commodities. But that isn't happening now as most players have either bailed out of everything completely, or are selling assets to meet margin calls.
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For commodity-watchers like me, I've looked on in surprise (as well as a little frustration) as commodities head the same way as stocks and pickings are slim. All the different commodities have suffered a hammering over the past few months, as the stock market's mess spills over.
The selling wave has taken all the major commodities to new lows for the year, with most markets giving back all their gains for 2008 and more. Let's see if we can pinpoint the next moves
Oil's slippery downward slope have we hit support?
There's no question that the oil has dominated the commodity headlines this year, topping out at $147 a barrel back in July.
But somewhat quietly amid the financial crisis, stock market slump, and bailout talk, oil has bounced down to around $60 a barrel. In turn, this has resulted in gasoline prices declining to the $2 a gallon level.
Although there might be more downside to come, it seems we may have hit a temporary support area here.
Natural gas could be nearing a bottom but we need more evidence
Oil's partner in crime - natural gas - has also endured a vicious selloff. Having topped out in July, it's given up just as much ground as crude oil, with the December 2008 futures contract dropping a solid 8100 points from top-to-bottom. That's a whopping $81,000 change in equity.
Like crude oil, natural gas seems to have found a temporary support level as prices have consolidated a bit over the past two weeks and remained in the same area. In order to feel confident about a support level, prices have to tread water for a while without giving up more ground. We're going to watch the price action for a while, but we could be getting near a bottom here.
Even the safe havens are on shaky foundations
Ask most folks to name which markets are usually the beneficiaries of an unstable financial market and you'll likely get the resounding answer: "Gold and silver."
Nine times out of ten, they'd be right. But not today. Even amid the economic turmoil, the safe haven hard asset metals can't muster up any bullish action.
Sure, they got caught up in the bullish frenzy over the summer, just like the other markets. But when the music stopped, investors decided to bail out of the metals, too.
However, take a look at the charts and you can see that they've joined oil and natural gas in trying to establish some support. We can see evidence of this in the fact that neither metal has made a new low over the past two weeks. If the stock markets can find their footing here, then the metals may move up just the same.
As you can see, the December silver futures currently sit at $10.40 an ounce, while the December gold futures are trading around $753 an ounce - a far cry from their highs this year of $19.70 an ounce and $1,000 an ounce respectively.
If the market feels confident that the Federal Reserve's bailout plan will work, investors could start dipping their toes into the long side of the market. If so, that could result in gold and silver moving higher. Until that happens, however, remain cautious, as it doesn't take much for widespread selling to rear its ugly head again.
It seems that 'support' is the word of the moment for the commodities sector. The rest of the markets (corn, wheat, soybeans, coffee, cocoa, sugar, orange juice, and cotton) are all trying to find a foothold and establish some support.
Having been torn apart in the nasty selloff over the past few months, though, it may take some time. Remember, if you're going to play these markets, stick to limited-risk option strategies like credit option spreads.
This article was written by Lee Lowell for the Smart Profits Report.
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