9 Things to think about before playing the Commodities Sell Off

Despite Twitter’s stock being at all-time lows (see our IPO post on that) – it’s still a great way to get the pulse on markets, as witnessed by some panic induced tweets that have been swarming around commodity markets reminding us that commodities are getting slammed, that commodities aren’t a good investment (depends on what exposure you’re getting), and that commodities = Crude Oil (not true).  But the questions remains, are commodities as a whole really taking a hit, or is it just the “big players” such as crude oil and gold that are seeing a sell off?

Behold, the current commodity carnage cliff notes:  (we averaged the cash price move for each time frame of the commodity markets seen on FinViz for each sector, and sorted by return over the last 12 months).

Commodities TableData as of 8/6/2015
Energy = WTI, Brent, Heating Oil, Gas RBOB Gas, Natural Gas, and Ethanol
Grains = Wheat, Corn, Soybeans, Soybean Oil, Canola Oil
Metals = Gold, Silver, Copper, Platinium, Palladium
Softs =  Cotton, Orange Juice, Coffee, Sugar, Cocoa, Lumber
Meats Live Cattle, Feeder Cattle, and Live Hogs

Now, there are two kinds of people in the world. Those who look at the numbers above and want to ride the momentum lower and lower; and those who see the red above and start thinking about the inevitable bounce when the sell-off subsides and these markets start to rise.  Do you Buy the Dip or Ride the Sell off Lower?

Buy the Dip?

If you’re the type of person who sees a falling knife and reach out to catch it, if you’re one of those looking to play a bounce, we’ll first point you to – How to Play a Bounce in Crude Oil.  Next, we’ll offer these (some serious, some not) options:

  1. Buy a Commodity Index ETF like $DBC, $GSG, and $DJP, or sector specific ones like $XLE, $DBB, or $GRU. But only after you get fully up to speed and understand the ins-and-outs of Contango and Backwardation.  If the market you choose to expose your portfolio to is in Contango, you’re going to be putting yourself through a roll yield cost and potentially be on the losing end even if the price is rising.  And don’t Buy the Cocoa ETF ($NIB), which is actually sitting up +9.93% YTD and near four year highs.  Not a candidate for your bounce theory.
  1. Like that idea? Then double it up with a double long Commodity ETF like $DAG. It currently is sitting just under $4 and is at all-time lows! Just beware those roll cost problems are magnified as well.
  1. Invest in a systematic managed futures program which, which is designed to participate in a meaningful bounce by bracketing the market, and entering into breakouts higher. They’ll lose money on some of those breakouts which don’t turn out to be the big rally higher, but in so doing will ensure they’ll participate in the big one which is a sustained rally higher. Learn more about those here.
  1. Buy farmland. It’s coming off of its 2013 high, but not by too much, via Marketwatch.“The average price for Iowa farmland fell nearly 9% in 2014 to $7,943 an acre, according to the Iowa State survey. Farmland data from regional Federal Reserve Banks also show a softening of prices across prime row-crop growing areas of the Midwest.”
    FarmLand
  2. Invest in a company that deals directly with commodities like $DE $AA $CAT. But what happens when the overall market is decreasing while the commodities they create their business from is also dropping? We talked about this issue with the energy markets vs. energy companies a while back, and see that the Argi-business ETF $MOO has actually increased the past three years (and past 1 year) despite the commodity sell off, telling us maybe this isn’t the bounce mechanism?  Maybe they may make more money with cheaper inputs? Maybe they trade more like stocks based on debt ratios and cash flow?MOO chart(Disclaimer: Past performance is not necessarily indicative of future results)
    Chart Courtesy: Finviz 
  3. Go on the Midwest Crop Tour and become a live tweeter. Before the days of twitter and social media, we used to have to rely on the (sometimes highly inaccurate Crop Report) from the USDA to let us know what crop conditions were like across the country. Now, just about everyone can get their hands on this information. But who needs reports when you can do it yourself? Recently, people set off around the Midwest and tweeted pictures of crops for a live update on conditions. You could certainly try your hands making your own decision on where corn or soybeans might go, but beware of the hundreds of other factors to consider such as international supply, a bad storm, etc.
  4. Invest in Monsanto ($MON) and risk the wrath of your non-GMO eating kids and California cousins. It has a patent on just about every crop seed around so as along you see corn growing (at all) more than likely it’s a byproduct of Monsanto.
  5. Enlist in a commodity focused managed futures manager like  Four Seasons Commodities Corp. or Bocken Trading.  These programs have decades of experience, not only analyzing crop data, but also digging an extra layer deep in talking to farmland insurance adjusters, talking to contacts in China, and more. If there’s a bounce coming, they could be just the ones who see the green shoots  first (literally).

Or Ride the sell off lower?

For those who think this sell off will continue (and perhaps even contaminate stocks and bonds in a global rout), that’s RCM’s specialty: systematic managed futures programs, which are designed to ride such momentum until it ends. You can see this investment represented by the Newedge CTA Index below, where the acceleration in the commodity sell off the past twelve months (which was reported as mainly oil prices, but in fact was across each commodity sector as seen above) propelled the index higher. Conversely, the pause in the down move causing a retracement/losses in the CTA index this spring.  Of course, that would require another sharp leg down in commodity prices ($30 Oil, anyone?).

Table of Newedge vs Commodity Index(Disclaimer: Past performance is not necessarily indicative of future results)

How will you choose?

 

 

 

 

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.