Commodity ETF Alert July 2014 Portfolio Update
MULTI-YEAR COPPER BREAKOUT LOOMS…
As you know, I sent out an email on July 10th, alerting you to the buying opportunity in the iPath DJ-UBS Copper (JJC).
Here’s additional insight into why we made this trade, and how it’s performing thus far.
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As I mentioned in our trade alert a few weeks ago, recent Chinese economic data has come in surprisingly strong.
Manufacturing readings are once again showing signs of robust expansion. Also, Chinese import/export data is reaching its strongest levels in months.
What’s the catalyst for this newfound burst of economic expansion?
Chinese officials adopted a new industrial stimulus package in April. And after a few months of the plan being in place, the economic benefits are starting to show.
What’s in the stimulus package?
The plan allows for tax breaks in small and medium enterprises along with new investment in railways and urban construction projects.
According to HSBC economists Qu Hongbin and Sun Junwei, the plan will allow for “smooth growth without exacerbating financial stability risks.”
No doubt about it, the resurgence in Chinese economic growth is doing great things for copper. The red metal has rallied from a low of $3.02 a pound in mid-June to a recent high of $3.27.
But here’s where it gets interesting…
The recent rally has the red metal trading at a very important long-term pivot point.
Let me show you what I mean…
Now take a look at the bottom green line. This is a support trend line marking the lows over the past three years. Notice how the lower green line is on a slightly different angle than the top line.
This pattern is called a declining wedge…
Should Chinese economic growth continue its current rebound, there’s a very good chance copper breaks higher from this pattern. Given the length of the copper downturn from the 2011 highs, there’s plenty of pent-up buying demand.
And that’s precisely why the metal is capable of reaching the $3.75 a pound level in coming months.
Now let me be clear…
Incoming Chinese data must be strong for such a breakout to occur. And it just so happens that the July flash Purchasing Managers’ Manufacturing Index (PMI) reading is released tomorrow evening (July 23rd).
We’ll need to see this reading confirm the significant economic expansion seen in June. If it does, we should see additional buyers come into the copper market.
On the other hand, if the report is below expectations, we could see the red metal drop to the $3.15 area.
Either way, keep holding the metal.
There are additional Chinese economic readings coming our way over the next few weeks. Any one of them is capable of sending copper higher.
As you know, we’re using the iPath Dj-UBS Copper (JJC) as our means to be long the copper market. JJC is currently trading at $39.10 a share, which is below our original maximum buy-up-to-price of $39.80.
Since we have important data hitting the headlines tomorrow, I’m moving JJC to a hold.
Without question, it’s going to be an interesting back half of the year for copper.
Keep holding JJC for a potential breakout to higher prices!
COMMODITY REVIEW
| COMMODITY | TICKER | CURRENT VALUE | LAST MONTH | CHANGE |
| Energy | JJE | $18.30 | $19.90 | -8.0% |
| Grains | JJG | $38.86 | $45.52 | -14.6% |
| Industrial Metals | JJM | $31.49 | $30.09 | +4.7% |
| Precious Metals | JJP | $66.41 | $65.79 | +0.9% |
| Softs | JJS | $47.04 | $50.79 | -7.4% |
| Livestock | COW | $32.55 | $32.11 | +1.4% |
| All Commodities | DJP | $37.79 | $39.93 | -5.4% |
ENERGY COMMODITIES
The US Oil Fund (USO) has been all over the map in recent trading…
Obviously, the panic created by the ISIS upwelling didn’t last long. That’s why the price of West Texas Intermediate (WTI) crude succumbed to a rather hefty selloff starting on July 2nd. By July 15th, the commodity was trading at $100 a barrel.
But now investors are jumping back on the bullish side of the market. Investors are concerned the US will apply additional sanctions on Russia due to its involvement in the shoot down of Malaysian Airlines flight MH17 last week.
Such a situation could slow the flow of oil from the world’s second largest exporter.
Fortunately for us, yesterday’s WTI rally to $105 a barrel has pushed USO back above the $38 level. But since crude’s recent rise is once again based on geopolitics and not sound supply/demand fundamentals, we’re putting a stop order under USO.
… If USO trades under $37.65 before we speak again, sell it.
Doing this allows us to capture more oil upside if it comes, while keeping our downside risk in check.
Now, as far as natural gas goes…
So far it has been an unseasonably cool Summer in the Eastern US. As a result, cooling demand in this key natural gas usage region has been undeniably weak. That has the price of the commodity dropping below $4.00 mmBtu for the first time since January.
What do we do with our position in the US Natural Gas Fund (UNG)?
Buy it.
Not only is natural gas drastically oversold in the short-term, but investors are ignoring the looming start of US natural gas exports next year. What’s more, US inventory levels are still 25% below the 5-year average for this time of year.
If you haven’t already, buy UNG at any price under $22.00.
GRAIN COMMODITIES
It was certainly a good decision to cut our grain trades from the portfolio in May. Since then, the price of corn, wheat, and soybeans has fallen precipitously. In fact, corn is trading at $3.72 a bushel- the lowest price since mid-2010.
What’s going on?
A near perfect planting season has morphed into an ideal growing season. Recent USDA reports suggest crops are in the best condition they’ve been in since 1994. 76% of corn and 72% of soybeans are in “good” to “excellent” condition.
While grains have become undeniably cheap, bears are in complete control of these markets.
As a result, it’s best to steer clear of grains for the time being.
INDUSTRIAL METALS
See this month’s update for news and recommendations on copper…
PRECIOUS METALS
Despite a selloff on July 14th, gold and silver are still hanging on to their massive June gains. While most of the talking heads in the mainstream business media chalk up the mid-July losses to a Janet Yellen speech, it likely had more to do with the $1,350 technical resistance zone in gold.
Take a look…
While we may see a bit of indecisive price action in coming weeks, I have little doubt gold will break above this technical hurdle in the long run.
The latest trading action still has our positions in the iShares Silver Trust (SLV) and iShares COMEX Gold Trust (IAU) beyond our buy-up-to prices.
As a result, keep these ETFs at a hold until further notice.
What about palladium and platinum?
If you’re keeping tabs on the South African labor strikes, you realize mining companies came to an agreement with workers a few weeks ago. Believe it or not, the price of palladium didn’t fall on the news as most analysts (including myself) thought it would.
Instead, the metal rallied to new multi-year highs near $890 an ounce!
The recent price upswing is a very telling sign of just how tight the global palladium market truly is. New supply is set to hit the market and prices are still jumping higher.
The recent rally has the ETFS Physical Palladium Shares (PALL) trading at $85.41, which is a gain of 15% from our official entry price of $74.37.
What do we do from here?
Given the strong uptrend and bullish fundamentals, let’s see if palladium can break above $900 in coming months. We may see a few short-lived selloffs here and there, but supply/demand metrics favor palladium continuing higher.
However…
Platinum is not reacting nearly as bullishly as palladium. The metal is still stuck in a tight trading range around $1,500.
But more importantly, the iPath DJ-UBS Platinum (PGM) has lost much of the liquidity it needs to trade properly. You’ve likely noticed how volatile the ETF’s price action has become in recent months.
Due to the growing risks of holding this ETF, we’re going to close this trade. PGM has simply become too unreliable for our needs. While I am still bullish on platinum, I am not as optimistic towards PGM.
SOFTS
Cocoa is holding steady at the $3,100 a ton mark. Recent data from Euromonitor International revealed emerging markets, like China and India, will make up 45% of global chocolate sales in 2014- a record high.
But more importantly, analysts see that figure jumping further in coming years. As emerging market consumers come out of poverty and into the middle class, chocolate is one of the first affordable luxuries they buy.
Clearly, cocoa demand has nowhere to go but up!
The iPath DJ-UBS Cocoa (NIB) ran to a new multi-year high of $41.28 on July 2nd. Let’s keep holding NIB for higher prices.
What about coffee?
The commodity is still lingering around the $1.70 a pound area as investors factor in conflicting Brazilian harvest data. Recent reports are all over the map with some regions showing robust crops while others look exceptionally weak.
As a result, we may see a few more weeks of choppy trading action for coffee. But in the long run, the odds still favor higher prices for the luscious bean.
The iPath Pure Beta Coffee (CAFE) remains a buy at any price under $22.50.
LIVESTOCK
After hitting another record high of $2.19 a pound in early July, the price of feeder cattle has pulled in slightly. The commodity is trading at $2.13 as of last night’s close. While it may seem unlikely given the record bullish run over the past year, cattle pricing is expected to remain strong.
As far as lean hogs go…
The ongoing outbreak of porcine epidemic diarrhea virus (PEDv) is devastating US hog farmers. The New York Times estimates the virus kills 100,000 piglets and young hogs each week.
Although the disease has slowed its expansion in the warm summer months, experts see the virus strengthening once cold temperatures arrive this Winter.
Given this information, it’s not surprising to see lean hogs trading near all-time highs at $1.30 a pound.
Category: Commodity Trading
