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COMMODITY REVIEW: 05-16-19

Written by Lance Roberts | May 16, 2019

We are adding a new monthly review of important commodities which may provide clues as to both the strength and direction of the markets and the economy.

CRB Index

  • If the economy was as strong as headlines suggest, the commodity index should be rising as demand for commodities grows. This was clearly apparent in mid-2017 as 3-major hurricanes and 2-massive wildfires devastated the U.S. requiring demand for raw materials.
  • This same story will be evidence in the following economically sensitive commodities as well.
  • A break below $178 will likely signal a test of fairly long-term lows below $170
  • No trade yet for $CRB

Copper

  • Copper, often called “Dr. Copper” because of its sensitivity to economic demand has remained weak as the rolloff of demand from natural disasters continues.
  • Still correcting its recent overbought condition and close to a sell signal suggests copper may well continue to weaken.
  • No position currently.
  • A break below $2.50 will likely suggest a test of $2.00 amidst a pickup in economic weakness.

Lumber

  • Lumber is looking to retest lows of the last 3-yeas, and like the CRB, it is clear the demand spike, and subsequent economic input from natural disasters, is over.
  • Lumber is close to triggering a “sell signal.”
  • A break below $300 will suggest both accelerating economic weakness and substantially lower lows.
  • No position currently.

Soybeans

  • One look at this chart and you can understand why American farmers are filing for bankruptcy.
  • With global demand slowing, the acceleration of the decline is becoming apparent. It is unlikely even a trade agreement with China at this point will repair the damage.
  • Soybeans are oversold BUT on an important sell signal.
  • There is a trade to $875 only. But the downside risk outweighs the reward.
  • Stops must be set at $800

Live Cattle

  • Demand for beef is on the decline and I am pretty sure “Beyond Meat” is NOT the culprit.
  • Given the cost of meat, cattle is a decent indicator of economic strength.
  • Cattle are oversold here BUT on an important “sell” signal.
  • No trade currently, but watch the message live cattle are sending.

Lean Hogs

  • Hogs are current performing better than live cattle and support is holding at $6.00
  • However, Hogs are overbought on the short-term and are carrying a very elevated “buy” signal.
  • If economic weakness is increasing, then look for a break back down to previous lows.
  • No position currently, but watch the $6.00 level for the next signal.

US Dollar Index

  • With roughly 40-50% of corporate profits coming from exports, all commodities globally traded in dollars, and the dollar impact on the bond market, this is a key measure to watch. Trade war will have an impact across many sectors of the market and the dollar will likely tell the story.
  • Currently, the dollar is breaking out of previous resistance and has now registered a buy signal. The combination of these two catalysts suggests the dollar could rise toward $100 on the index.
  • With the dollar flirting with a “buy signal,” a stronger dollar looks to be the play as the “trade war” attracts foreign dollars into U.S. Treasuries.
  • Be long the dollar with an initial target of $100.

10-Year Interest Rates

  • As noted above, the stronger dollar and the “trade war” are driving foreign investors into the “safety” of the U.S. Dollar.
  • Rates just broke below the previous lows of 2.4% and suggests a potential test of 2.1% may be in the works.
  • Add to long-bond positions and increase duration slightly in portfolios. (7-10 years).
  • Rates are oversold so a buy towards 2.5% would likely be an ideal entry point to add exposure.

Gold

  • Gold held important support at $1270 and is wrestling to climb above its 50-dma.
  • Gold is threatening to trigger a short-term sell signal so support at $1270 needs to hold for the time being.
  • Hold positions but be patient in adding exposure until the 50-dma is broken above.
  • Maintain at stop-loss at $1250

Oil – Black Gold

  • The rally in oil from the 2018 lows appears to be complete.
  • The good news is that oil is holding support at the 50-dma which has finally crossed back above the 200-dma.
  • Stay long oil and energy-related investment for now BUT be critically mindful that oil is ultimately negatively impacted by both a weaker economy and strong dollar.
  • Stops must be set at $58.
  • That signal has been triggered and VTR is not yet oversold.
  • We blew through our initial $60 target so cover 1/2 of the position immediately.
  • Stop is now moved to $62
  • Position can be re-shorted on a failed rally to $61.50

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Lance Roberts is a Chief Portfolio Strategist/Economist for RIA Advisors. He is also the host of “The Lance Roberts Podcast” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, Linked-In and YouTube

2019/05/16
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