Commodities across the board rallied after the Russian invasion of Ukraine and have since declined significantly.
Before the War though, commodities were already enjoying a rally due to results of the pandemic such as supply chain, low production, rising demand, high government debt and labor shortages.
The other significant factor influencing commodity prices is the value of the U.S. dollar. A stronger greenback makes dollar-denominated commodities more expensive for foreign buyers, which pushes prices lower.
Right now, the dollar seems to have found a peak. With FOMC on tap, that could change. Assuming a peak has been established, we can also make that a reason for a bigger move in commodities.
So while a short-term correction ensues, commodities could still have massive room to run in the longer term. The Invesco DB Commodity Index Fund is currently near the 50 day moving average suggesting commodity prices have found support and will continue higher.
Next week, there will be lots more earnings on tap plus, we have the FOMC meeting. With expectations of a raise by 75 bps, there has been hints of perhaps .50 bps instead.
Moreover, Powell suggested that this raise at the next meeting could be the end of aggresssive rate hikes in general.
If one follows the logical path we can assume a few things:
- What we did see this past week was a potential bottom in gold and in bitcoin.
Whether we see more rally in the equtities remains to be seen, yet, the rally to resistance certainly supports a stagflation-trading range scenario.
This coming week, watch a few key indicators.
First, watch the yields and the high grade plus high yield bonds.
Secondly, watch the consumer discretionary sectors. We need to see the consumers stay in the game.
Watch the dollar and the gold market-if gold continues to hold the major multiyear support, then we see a big gold rally coming.
Finally, watch the oil and energy market. Should crude oil join natural gas in a new bull run-commodities will soar while equities will suffer.
Investing in commodities can be a speculative bet on future price movements or a way to hedge against other investments in one’s portfolio. Energy commodities, for example, may be used as a hedge against inflation.
Adding commodities to a larger balanced portfolio can also help reduce risks as commodity prices tend to have low correlation to other assets such as stocks and bonds.
Commodities provide valuable diversification and enhanced risk-adjusted returns to a portfolio, but active management is needed, due to volatile price swings.
Stock Market ETFs Trading Analysis & Summary:
S&P 500 (SPY) 403 big resistance 390 support
Russell 2000 (IWM) 176.50 support to hold and now must take out 182.50
Dow Jones Industrials (DIA) 322-323 resistance 316 support
Nasdaq (QQQ) 308 big resistance 293 support
KRE (Regional Banks) 60 key support
SMH (Semiconductors) 221 support 230 resistance
IYT (Transportation) Fri I noted the pause here in XRT and IWM-the decision was sell-now 221 support
IBB (Biotechnology) Given the bearish type day, still in best shape with support 120
XRT (Retail) 62.90 support on the 50-DMA
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The author may have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not represent the views or opinions of any other person or entity.
