Tuesday, November 4, 2014

Commodities Gap Lower-Hedge Funds Blowing up?



Commodities across the board are lower this morning.  Oil is more than $2 lower, Corn is down $0.07, Gold is off $2.50, Copper is lower by $0.06.  The CRB Index is gapping lower this morning by 3.2 and is testing a level not seen since June of 2012.  Interestingly, the CRB Index fell hard near the close yesterday.  There was a 10 min drop late in the day yesterday on the CRY where the fall over the 10 minute window was greater than any over the last 30 days.  This might have warned some.

There is some serious commodity bashing going on and some of the price action is likely attributable to expectations for a softer economy.  China shifting to concentrating on domestic growth rather than how much they can ship is another.  Finally, we might consider the possibility that some funds were hurt in the gyration of markets in mid-October and have been weakened further by falling commodity prices, leading to fire-sale activities. 

We would be more inclined to view today’s commodities price action as a blow-off and not the start of a longer timeframe decline in prices.  While a continued and precipitous fall in commodities and a deflationary environment would of course change the economic outlook, this is not an expected outcome. The global economy is still expected to function at slightly below trend while the U.S. domestic economy achieves growth at slightly above trend.

 The wash over effect from lower oil prices in the last months has changed psychology for commodities in general.  This is not expected to be a lasting condition.  In the interim however, there is NO MEANINGFUL BULLISH CANDLESTICK PATTERN THAT SUGGESTS BUYING.  IT IS STILL BETTER TO WAIT FOR THIS KNIFE TO HIT THE TABLE BEFORE COLLECTING A BULLISH POSITION. It might happen today.  Let’s wait and see.   



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