CEA Portfolio Update – July 2015

| July 28, 2015

Commodity Crush Consumes All…

As you know, I sent out an email on July 15th, alerting you to the buying opportunity in the Newfield Exploration $NFX.

Here’s additional insight into why we made this trade, and how it’s performing thus far.


No doubt about it, the past few weeks have been incredibly detrimental for the commodity markets as a whole.

A sudden wave of unadulterated bearishness has investors dumping commodities left, right, and center.

It was tough to escape the recent downturn…

West Texas Intermediate (WTI) crude is down 19% over the past month.  Gold has dropped nearly 7%, silver 8%, copper 11%, and wheat 10%.

The only commodities nibbling at slight gains the past month are lean hogs and natural gas.

It’s ugly folks…

Unfortunately, this new wave of selling has triggered multiple risk control lines in our portfolio.  Our trade in the First Trust ISE Revere Natural Gas ETF $FCG stopped out at $9.07 in late June.

And our most recent trade in Newfield Exploration $NFX met its demise yesterday as our risk control price of $31.39 was triggered in early morning trading.

But that’s not all…

With WTI sinking back below $50 a barrel in recent trading, the Energy Select Sector SPDR $XLE ran to new yearly lows under $71 a share.  Thankfully our stop loss order at $71.75 protected us excessive damage in this position.

Remember, each and every position in the Commodity ETF Alert is protected by a 10% stop loss.  Sudden bouts of relentless bearishness like we saw the past few weeks are exactly why these risk control procedures are so important.

So, where do we sit now?

The only remaining open position we have in the portfolio is the US Natural Gas Fund $UNG.  This natural gas based ETF is still stuck in a sideways trading pattern between $14 and $13.

I suggest you keep $UNG at a “hold” in your portfolio until this current spate of commodity bearishness runs its course.  Of course, our risk control line at $12.13 should be adhered to no matter what.

With all this gloomy talk, is there anything to look forward to in the commodity space?

In times like these, it’s tough to see through the treacherous storm clouds to the blue sky in the distance.  The current commodity downturn may seem like it has no end in sight. 

But I assure you this bearish onslaught will eventually come to an end.

Let me explain why…

Much of the recent commodity downturn has to do with the continued strength in the US Dollar.  As you know, the world’s reserve currency has been remarkably strong this year thanks to multiple factors.

For starters, the Greek debt debacle and overall weak European economy had the Euro exhibiting extreme weakness most of this year.  Of course, it was the plummeting Euro that helped send the Greenback higher.

But with Greece and Europe finally getting their house in order, the Euro is poised for a remarkable comeback.

It may not be this month, but a strengthening Euro is a near certainty in my book.

And when it happens, we’ll very likely see renewed bullish interest in commodities.

Now, that’s not to say there isn’t going to be opportunity in commodity producing companies for the foreseeable future- quite the contrary actually.

While it has certainly been a rough ride for commodity producers the past few weeks, select companies are getting ridiculously undervalued.   In fact, they’re so inexpensive after this most recent downturn, you’d have to be crazy not to throw money their way!

But we have to be very careful…

The stocks of nearly all commodity producing companies are stuck in horrific downtrends.  We need to see these bearish trends alleviate before we dive in these markets head first again.

With that said, it’s best we just sit on our hands for a few days.

I’m not a fan of immediately throwing new capital into industries we just experienced losses in.

Instead, let’s be patient and let the best opportunities develop.

When a great low-risk/high reward opportunity in the commodity space reveals itself, you’ll be the first to know!


Commodity Review

Commodity Ticker Current Value Last Month Change
Energy JJE $8.88 $10.37 -14.4%
Grains JJG $33.54 $33.83 -0.8%
Industrial Metals JJM $22.18 $23.99 -7.5%
Precious Metals JJP $51.17 $55.86 -8.4%
Softs JJS $30.14 $31.80 -5.2%
Livestock COW $25.67 $26.79 -4.2%
ALL COMMODITIES DJP $25.71 $28.31 -9.2%
As of 07/27/15


Energy Commodities

The crude oil downturn that started in late June gained momentum over the past few weeks.  Thanks to ongoing oversupply issues, West Texas Intermediate (WTI) lost 19% over the past month, which puts it solidly below $50 a barrel again.

Remember, the yearly low for WTI was $42.50, which was set in mid-March.  Given the overwhelming bearishness towards oil right now, there’s a distinct possibility we hit that low in coming weeks.

What about natural gas?

As I mentioned earlier, the commodity was one of the few that avoided losses the past few weeks.  With natural gas stuck in a tight trading range between $2.90 mmBtu and $2.70 for the past month, it’s clear neither bulls nor bears are willing to make a stand just yet.

However, with US natural gas exports starting soon, along with a hot Eastern US summer, there’s a very good chance bulls will come to the rescue this Fall.


Grain Commodities

The only bit of bullish commodity excitement over the past month came from corn, soybeans, and wheat.  The three commodities broke sharply higher in mid-June as traders reacted to abundant rains in the US Corn belt.

Precipitation was so heavy in parts of Indiana, Illinois, Ohio, and Missouri that corn and soybean fields turned into a muddy mess.

Thanks to the excess rain, the US Department of Agriculture (USDA) reported poor corn quality conditions and soybean plantings that were way behind schedule.

While it was tempting to go long these commodities in early July in hopes of additional upside, something wasn’t right…

The abrupt rally late last month was largely due to short covering instead of new longs coming into the market.  As a result, further upside in grains was suspect once the majority of shorts had exited the market in early July.

Take a look at the charts of corn, soybeans, and wheat and you’ll find the decision to avoid these markets was prudent.  All three of the commodities are nearing the lows set before last month’s rally took place.


Industrial Metals 

Thanks to growing worries over the strength of China’s economy, the price of copper is suffering a brutal downturn.   In fact, the red metal plunged to new yearly lows at $2.40 a pound in recent trading.

What has investors questioning China?

Not only is economic data still coming in decidedly weak, but Chinese markets are still under immense pressure.

On Monday, the Shanghai Composite Index plunged a startling 8.4%.  This Chinese market downturn is something investors will be keeping a close eye on in coming weeks.

If Chinese stock market selling gets out of hand again, copper, along with other commodities and US stocks, will likely see additional downside.


Precious Metals

It was a big month for precious metals- but not in a good way…

Gold broke below important multi-year technical support at $1,150 an ounce on July 15th.  Once this barrier against lower price was breached, that was all she wrote.

The yellow metal plunged to $1,080 in a short span of a few days as bullish investors ran for the hills.

After it’s all said and done, gold is ending this month down 6.7%, while silver, platinum, and palladium are chalking up losses of 7.8%, 8.6%, and 8.8% respectively.

While we may see a relief rally in precious metals in the near future, the underlying trend is still overwhelmingly bearish.  As a result, I wouldn’t be surprised to see gold hit $1,000 an ounce by the end of this year!



Unfortunately, the once strong softs complex succumbed to overall commodity bearishness this past month.  Cocoa, which was leading the charge to higher prices in recent months, turned sharply lower a few days ago after hitting multi-year highs at $3,400 a ton.

Meanwhile, cotton, coffee, and sugar all struggled to losses of 4%, 10%, and 6% respectively on the month.


Thanks to strong summer meat demand, lean hog prices are on the rise.  In fact, the commodity was the strongest performer over the past month with gains of 13%.  While it’s nice to see lean hogs finally put together a nice rally, the upside is very likely limited from current prices.

Meanwhile, live and feeder cattle backed away from their recent run to new all-time highs.  Recent USDA feedlot readings reveal cattle numbers are strengthening, which will likely limit further upside in these markets for the remainder of the year.


Category: Commodity Trading