Commodity ETF Alert November 2014 Portfolio Update
China Takes Action!
As you know, I sent out an email on November 14th, alerting you to the buying opportunity in the Powershares DB Commodity Index Fund (DBC).
Here’s additional insight into why we made this trade, and how it’s performing thus far.
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The People’s Bank of China took investors by surprise last week…
In hopes of bolstering economic growth, China’s Central Bank announced a 40 basis point cut to one-year benchmark lending rates.
Thanks to the cut, interest rates now stand at 5.6%.
Why did China cut rates?
The unexpected move comes at a time when Chinese officials are growing increasingly concerned about their country’s economic growth prospects.
In fact, China’s GDP is expected to slow to 7.4% this year.
While growth of this magnitude is the envy of developed economies the world over, it’s a 24-year low for China.
What do Chinese interest rates have to do with commodities?
As you’re likely aware, China is one of the largest commodity consumers on the planet. According to the International Monetary Fund (IMF), the country accounts for over 20% of non-renewable energy sources, 23% of major agricultural crops, and 40% of base metals.
With China taking action to support economic growth, commodity prices will eventually turn higher as demand increases.
And that’s precisely why our position in the Powershares DB Commodity Index Tracking Fund (DBC) jumped to higher ground last Friday.
Take a look…
As you can see, DBC popped to $21.75 upon China’s rate cut announcement.
Remember, DBC holds a basket of commodities including aluminum, heating oil, crude, natural gas, silver, soybeans, sugar, wheat, zinc, gold, corn, gasoline, and copper.
With China finally taking action to support their economy, our bullish trade in DBC is on the right track.
But we have to be careful…
As I mentioned in our recent trade alert, the rising US Dollar is still a major headwind for commodities. Without question, the currency has been a thorn in our side since July 2014.
In order for our trade in DBC to be successful, the Greenback must turn lower… and soon.
As you can see in the chart above, DBC gave up last Friday’s China induced gains due to a steady bullish grind in the Dollar.
Here’s the bottom line…
China’s interest rate cut is just what we want to see, as it will spur long-term commodity demand.
However…
Despite this bullish development, we still don’t want to fight the rising US Dollar.
If investors are determined to push the Greenback higher, we’ll have to close our DBC trade for a small loss. Remember, our stop loss in this trade is $21.20. If DBC trades below that level, I suggest you close this trade.
Otherwise, leave it open for higher prices!
COMMODITY REVIEW
| Commodity | Ticker | Current Value | Last Month | Change |
| Energy | JJE | $15.06 | $14.84 | +1.5% |
| Grains | JJG | $37.52 | $36.78 | +2.0% |
| Industrial Metals | JJM | $29.63 | $28.84 | +2.7% |
| Precious Metals | JJP | $57.00 | $59.05 | -3.5% |
| Softs | JJS | $42.91 | $43.57 | -1.5% |
| Livestock | COW | $32.24 | $31.99 | +0.8% |
| ALL COMMODITIES | DJP | $33.89 | $33.76 | +0.4% |
| As of 11/24/14 |
Energy Commodities
This is an enormously important week for the global oil market. The Organization of Oil Exporting Countries (OPEC) is meeting this Thursday to discuss crumbling crude prices.
As you’re likely aware, West Texas Intermediate (WTI) crude collapsed to $75 in recent trading. The recent downturn stopped us out of our position in the US Oil Fund (USO) at $29.75.
What do we do now?
Wait.
While I have a strong hunch that OPEC will cut production dramatically this week, there are simply too many unknowns in the crude market right now. As a result, it’s too risky to establish a new crude position- long or short.
What about natural gas?
Mother Nature is finally pushing our position in the US Natural Gas Fund (UNG) to higher ground!
A brutal cold spell swept through the Central and Eastern US over the past few weeks. Thanks to soaring consumer heat demand, natural gas soared 17.8% over the past month. The commodity set a new multi-month high at $4.65 mmBtu just last week.
What should we do with UNG?
Keep holding the natural gas ETF for higher prices this winter.
While there’s a warming spell expected in coming days, I suspect we’ll see more brutally cold temperatures over the next few months. And that means there’s a very good chance we see natural gas jump to $5 mmBtu by February!
Grain Commodities
Along with natural gas, grains are one of the few bright spots in the commodity space. Corn rallied 8.3% in the past month, while wheat jumped 7%. Soybeans followed with gains of 4.9%.
The recent corn rally sent our position in the Teucrium Commodity Trust Corn Fund (CORN) running as high as $27.09, which is a 14% gain from our $23.70 entry price. As I write, CORN is trading at $25.84.
Let’s keep holding our position in CORN for higher prices. While we may see a slight pullback in coming weeks, the $3.20 a bushel low set in early October is very likely a long-term bottom.
Industrial Metals
Copper is still stuck in a choppy trading range near $3 a pound. Despite news of China’s rate cut last Friday (which is bullish for copper), the commodity couldn’t hold onto gains.
The lack of bullish trading activity tells me investors are simply ambivalent towards the red metal right now. As a result, let’s leave our position in the iPath DJ-UBS Copper (JJC) at a hold and keep our stop loss order at $35.80.
Precious Metals
As I’m sure you’re aware, last month was tough for our precious metals positions. With the US Federal Reserve bringing QE3 to an end, the US Dollar soared to new 52-week highs in late October.
With the greenback in rally mode, our positions in the iShares Silver Trust (SLV), iShares COMEX Gold Trust (IAU), ETFs Physical Platinum (PPLT), and ETFs Physical Palladium (PALL) all hit the respective stop losses provided in our last monthly update.
It’s a tough pill to swallow, but setting stop losses under our precious metals positions was absolutely necessary.
What do we do now?
Unfortunately, it’s abundantly clear that investors aren’t concerned with the long-term bullish supply/demand fundamentals in gold, silver, platinum, and palladium.
As a result, it’s best to steer clear of these metal markets until a) the Dollar turns swiftly lower and/or b) inflation suddenly shows up in monthly CPI and PPI readings.
Folks, there’s an old market saying that goes like this…
“The market can stay irrational longer than you can stay solvent.”
It’s no fun throwing in the towel on these trades, but we simply can’t afford to argue with the rising US Dollar.
Softs
The weakening Asian cocoa demand I spoke of in last month’s update sent cocoa sharply lower in October. As a result, our position in the iPath DJ-UBS Cocoa (NIB) hit our $37.90 stop late last month.
But here’s the deal…
The recent downturn in cocoa is likely temporary. The International Cocoa Organization (ICCO) is forecasting supply deficits for the next several growing seasons.
With such bullish long-term fundamentals facing cocoa, we need to keep a close on the commodity for a rebound in coming months.
What about coffee?
After running to new yearly highs at $2.25 a pound in mid-October, the commodity is currently stuck in trading range just shy of $2.00. What’s more, the iPath Pure Beta Coffee (CAFE) is trading at $23.17, which is slightly below our original entry point of $23.90.
The coffee market is essentially in limbo now that rains are gracing Brazil. While there’s still a good chance of another leg higher for coffee in coming months, the odds of a downturn have increased.
As a result, let’s keep CAFE at a hold and leave our stop order at $21.50.
Livestock
Feeder and live cattle are finally seeing some weakness after months of strong gains.
Live cattle sank to $1.69 in yesterday’s session after testing 52-week highs at $1.71 last week. On the other hand, feeders fell to multi-week lows at $2.33 after the USDA reported cattle on feed rose above year ago levels for the first time since August 2012.
Category: Commodity Trading
