Commodity ETF Alert May 2010 Portfolio Update

| May 25, 2010 | 0 Comments

May 25, 2010

Europe puts global economic recovery in doubt…

The past two weeks have been a roller coaster ride for investors everywhere.  Events in Europe have put the possibility of a double dip recession back on the table.  Of course, commodity markets are reacting poorly as investors cut back on risk assets.

Economically sensitive commodities are taking it especially hard.  Investors are realizing the debt problems in Europe may hurt global growth going forward.  As a result, oil and some industrial metals have seen heavy selling in recent weeks.

This is creating an oversold condition in some of these markets.  We’ll go over this in more detail in our position updates…

As far as Europe goes, nobody knows just how deep the rabbit hole is… 

The European Union (EU) and the European Central Bank (ECB) are working feverishly to control the fears.  At this point, it is anybody’s guess as to how this will all play out.  If the EU and the ECB can calm the fears, we may see the markets regain their footing.

But if they can’t…

We may see further downside across the board as outright deflation rears its ugly head again.  This is the same force that put commodities in a death spiral in 2008.

The markets are ignoring fundamentals right now…

Investors are selling now and asking questions later.  This puts our portfolio in a position where we have to control our downside risk.  We have to use common sense in managing our positions.

We are expecting a snapback rally in coming days.  But if we don’t get it, we have to draw the line in the sand with a couple of our positions.

So let’s get to our position updates, we have a lot to cover…

Position Updates

. . . . iPath S&P GSCI Crude Oil Total Return ETN (OIL) – HOLD

Crude speculators are jumping ship.  The sharp drop we’re seeing in oil is due to panic selling… plain and simple.  Large institutions may even be deleveraging to raise capital. The situation in Europe is unnerving a lot of investors right now.

As the Euro plummets, the U.S. Dollar is skyrocketing…

Remember, the dollar’s relationship to oil is inverse.  When one goes up, the other goes down.  So the surge in the dollar is having a big negative effect on oil prices.

As you know, we are now seeing losses on our position in OIL.  So here’s what we’re going to do…

As I said earlier, we are expecting a snapback rally in crude.  I expect it to jump back up to the mid to high $70 range on this bounce.  If we do get this rally, I want you to hold your position in OIL.

However, if OIL continues to fall, we have to get out.  We can’t take the risk of riding crude oil down to $50 a barrel or lower.

If our position in OIL closes below $20 within the next two weeks, I want you to sell it.

I hate to have you sell it this low and at a loss, but we have to use common sense.  We could see crude oil fall back into a deflationary spiral if the situation in Europe gets worse. We have to conserve capital in order to stay in the game.

. . . . iShares Silver Trust (SLV) – HOLD

Silver jumped to test the 52-week highs just a few short days ago.  Since then, silver has seen a quick bout of selling.  But don’t worry, it’s ok to see some selling at those levels. Silver will remain volatile in coming weeks as the market prices in new risk factors from Europe.

The fundamentals for silver still look great… 

If the problems in Europe are contained, silver could go higher as industrial demand continues to grow.  As you know, there are many uses for silver…

However, if the problems get worse, we could still see upside for silver.  Investors will flock to precious metals in a flight to safety.

In my opinion, the only way we will see silver and gold have a big fall is if we have a deflationary collapse.  But, even with the problems we have in Europe, we don’t see that happening.

Keep holding your silver positions for further upside.

. . . . iShares COMEX Gold Trust (IAU) – HOLD

Gold prices broke out to all-time nominal highs over the past two weeks.  The buying spree pushed the yellow metal into a short-term overbought condition, which is why we’re seeing the pullback in recent days.

Keep holding your position in IAU.  Like I mentioned in the silver update, prices should head much higher.  But don’t be surprised to see high volatility in the near future for gold prices.

We have huge gains in this position.  But don’t let yourself get scared out of this position and take profits too early.  IAU has substantial upside potential.

. . . . iPath DJ AIG Grains ETN (JJG) – HOLD

As equity and other commodity markets are selling off, grains are holding nicely.  Corn, soybean, and wheat prices are fairly cheap right now.  However, the spring planting season is going off without a hitch.  And this is keeping bulls out of the market.  In fact, the grain trade this spring is turning out to be a quiet one.

But let’s keep holding.  Grains are a good deal at these prices.

. . . . United States Gasoline Fund (UGA) – HOLD

Gasoline prices have really been taken out to the woodshed.  UGA is now extremely oversold.  I feel the recent selling is due to deleveraging by institutions.  There is no fundamental basis for UGA to fall in such an extreme manner.

But we can’t ignore the facts.  We’re now underwater on our UGA position.  At some point, we have to say “uncle” to conserve our capital.

So here’s what we’re going to do…

We don’t want to sell UGA just yet… I think UGA may “snapback” to the upside along with OIL.  However, if I’m wrong, UGA may head lower in a hurry.  Sell UGA if it closes below $31 within the next two weeks.

Again, we have to control our downside risk.  We can’t allow ourselves to ride this position back down to the 2009 lows.

. . . . iPath DJ-UBS Copper ETN (JJC) – Buy up to $44.25 per share

We’ve had plenty of good opportunities to get in copper at great prices.  JJC went all the way down to test the $40 level before bouncing back in recent days.

Copper (JJC) was strong at the end of last week, while the equity markets were dropping quickly.  This relative strength is a great sign for copper.  It means investors are realizing copper is oversold and they’re getting in at great prices.

But we still have to be careful…

If the situation in Europe continues to get worse, copper may head south along with everything else.  The global economy is all of a sudden finding itself on a precipice.  Things have changed drastically from just a few shorts weeks ago.

We want to stay in JJC for now, as we may see a substantial jump in coming days. However, if JJC closes below $38, I want you to sell it.

We’ve had some extraordinary gains in many of our commodity investments over the past year.  It’s only natural we’re going to see some losses every once in a while.

The important thing to remember is to keep your common sense about you in these wild markets.  Those who can control their emotions are the ones who will be able to take advantage of the next great opportunity.

Category: Commodity Trading

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.