Why Commodities Matter to You (Re: Stocks)

Yesterday I was speaking to an FA who was considering subscribing to The Sevens Report and he told me that one of the reasons he liked the Report was because of the daily commodity market analysis.

He said that plain English commodity market analysis was hard to find and we provided a great daily summary of what he needed to know in oil, gold, copper, etc. 

What I found most interesting about the comments was that he said he doesn’t trade or invest in commodities for his clients.

But, he understands that he needs some commodity analysis because in today’s market, what happens in commodities effects stocks and bonds (and we’ve seen that again this summer with oil’s plunge weighing on all risk assets).

And, that’s why every day at 7 AM we provide analysis for our subscribers of all markets:  Equities, Commodities, Currencies, Bonds, and any important Economic Data, because it all effects client portfolios.

I started in this business with Merrill and I went through their analyst training program, and I remember sitting in that class room in downtown Manhattan and listening to presentations on stocks, bonds, economic data, the basics of corporate finance, and equity valuation – but there was nothing on commodities.

Back then, commodities were like the “Red Headed Step Children” of the financial services industry – it was a realm dominated by physical commodity trading firms and no one would ever consider putting a client into the commodity markets.

So, because of this institutional “ignoring” of commodities, the vast majority of FAs out there have no real training on how to analyze the commodity markets.

And, for a long time, that was “ok.” 

We can all remember a time when movements in oil, gold, copper and other commodities had absolutely no influence on the stock market, but in post 2008 world, that simply isn’t true anymore.

We do have training in analyzing the commodity markets and interpreting what movements in commodities mean for stocks and bonds, because I spent five years as a trader and portfolio manager at a commodity hedge fund. 

And, that analysis is helping our paid subscribers:

  1. Navigate these volatile markets and
  2. Demonstrate to their sophisticated clients and prospects that they don’t just rely on “Perma-Bull” research from the firm’s CIO
  3. Show they are watching all asset classes to help protect portfolios and outperform.

Sophisticated, ultra-high net worth clients want to see their advisor watching more than just the stock market, and our daily research helps our subscribers demonstrate to those types of clients and prospects that they understand all markets, not just stocks.

Twice in the last twelve months, a collapse in crude oil has been a leading indicator for a decline in the stock market. 

First, it was back in November/December of 2014, when a 26% drop in oil was followed by a 5% drop in the S&P 500 three weeks later.

Then, this summer, oil broke down in June, plunging 38% peak to trough, and we all know what happened to stocks over the past month (the S&P 500 has dropped 8% from the summer highs).

Point being – if you’re not getting regular analysis on all asset classes, including commodities, then you’re at a disadvantage in this highly correlated environment.

Recently, we have been tracking a potential “bottom” in the commodities markets, which could be a positive signal for stocks.  Our paid subscribers have known about this for a few weeks and have been sharing that information with their sophisticated clients, but we wanted to provide an excerpt of recent analysis that shows why commodities may finally be putting in a bottom.

Are Oil and Copper Signaling a Bottom in Commodities (and if So, the Stock Market). 

Oil:  Three Fundamental Positives

Oil has enjoyed a near 20% bounce from the lows of $37.75 two weeks ago, but despite that rally, it doesn’t mean that a bottom is “in” just yet, because a lot of that move higher was the result of a violent short squeeze. 

But, while all the focus is still on the very volatile price action, quietly last week fundamentals continued to turn slightly more positive (or at least, less negative).

  • The US rig count and US production are declining, as low prices are (finally) having an effect on oil production.  The US rig count started to decline (down 13 rigs) again after rising over the last few weeks, while US production declined another 19k barrels per day and remains below the 4 week moving average, implying the greater trend in US production is lower.
  • Congress is said to begin considering a bill to lift the multi-decade old ban on crude oil exports from the United States, which wouldn’t necessarily be bullish for oil prices globally; but, it would be positive for US oil prices, as exports would introduce new international demand.
  • OPEC made the headlines again last week as they continue to look for non-OPEC cooperation in cutting the global production surplus that has led to the current supply glut. There is speculation that despite saying otherwise, Russia may begin acting with OPEC, although this is still only speculation.  Point being, though, OPEC is starting to become more active in searching for ways to reduce the global supply glut, and with oil prices still depressed, that’s a potential bullish catalyst between now and the end of the year.

Commodity markets are equally influence by fundamentals and technicals so we have identified a key support level in oil that, if it holds this week, will strongly imply that a medium term bottom is “in” given these potentially positive fundamentals.

Copper:  A Downtrend Broken

Subscribers to The Sevens Report know that copper is a broad proxy for Chinese economic growth, and since concerns about China are at the heart of recent market turmoil, the recent positive price action in copper is a potential positive to watch. 

Yesterday copper surged 5.30% and reached a six-week high thanks to two main bullish influences:

  • Commodity giant Glencore announced the closure of two mines that will result in a roughly 400K ton decrease in production over the next year and a half.  So, like in oil, low prices are finally starting to curtail production. 
  • Chinese August trade balance data showed a larger than expected decline in imports (which is usually commodity bearish) the details of the report showed a 4% increase in copper imports year over year (that’s why we look past the headlines on these reports).

Technically speaking, copper rallied to a six-week high and closed above the 50-day moving average for the first time since mid-May. A near-term uptrend has formed on the charts, which leaves us cautiously bullish on copper as we watch the rest of the commodity space attempt to bottom. Uptrend support lies at $2.34, and it will be important for that level to hold in the near term.

Bottom Line

The breakdown in commodities was a leading indicator for this correction in stocks, so a bottom in oil and copper will likely be a leading indicator for a broad stock market bottom.

While it’s too early to say a bottom is in just yet, we are committed to identifying a market bottom in commodities and alerting our subscribers as soon as the facts tell us that bottom is in, so they can seize tactical opportunities to help their clients outperform.

Stocks, bonds, currencies, commodities, and economic data – all the information you need to know each trading day so you can spend your time building client relationships and getting more referrals.

As a courtesy, I am extending a limited time, special offer to new subscribers of our full, daily report that we call our “2 week grace period.”

If you subscribe to The 7:00’s Report today, and after the first two weeks you are not completely satisfied, we will refund your first quarterly payment, in full, no questions asked.

Click this link to start your quarterly subscription today. 

We Find the Leading Indicators

1. In January 2014, when the S&P declined 7% in three weeks, we correctly identified that emerging market currencies were the “reason” for the drop, and identified the Turkish Lira as the key indicator to follow.  When it bottomed, stocks bottomed, and our subscribers knew it.

2. Last April, when the S&P 500 declined 4% in two weeks, we alerted our subscribers that the “momentum” sectors of internet stocks and bio-techs were responsible for the drop, and specifically identified QNET and NBR as two leading indicators to watch.  When they bottomed, stocks bottomed, and our subscribers knew it.

3. During the September/October declines, our subscribers knew junk bonds (and the ETF JNK) were the leading indicator for the market.  When JNK bottomed, so did the market.

4. Recently, as early as November we told our subscribers that oil, XLE and the Dollar Index were the leading indicators of markets, and until the first two stopped declining and the latter stopped rising, stocks would be under pressure.

Our ability to identify key leading indicators has had a direct benefit to our subscribers, and I know that because they’ve told me.  One subscriber (an FA at a bulge bracket firm) wrote to us saying:

“Thanks for your continued insight; it has saved my clients over $2M USD this year…Keep up the great work,” 

We watch all asset classes to generate clues and insight into the near term direction for stocks, and while we are happy stocks are grinding relentless higher, our job is to remain vigilant to the next decline.

To experience your own success and 1) Make More Money, 2) Save One Hour a Day, and 3) Have More Confidence and Build Stronger Relationships with your clients, subscribe to The 7:00’s Report right now.

If you want to make your business more successful, you have to possess unshakeable confidence in your knowledge, and helping you acquire that knowledge is what The 7:00’s Report is all about. So, give yourself the gift of confidence in 2015.

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Best,
Tom

Tom Essaye,
Editor of The 7:00’s Report

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