USING ETFS TO BENEFIT FROM RISING COMMODITIES-- COPPER STOCKS LEAD BASIC MATERIALS GROUP -- ENERGY LOOKS OVERBOUGHT
CRB INDEX HITS FOUR MONTH HIGH... The CRB Index (of seventeen commodities) gained 3.56 today to close over 281 for the first time in four months. Thirteen commodities rose. The fact that orange juice and cotton were among the biggest gainers may be due to hurricane activity. But that's not the whole explanation. Energy prices are up. Copper is trading at a six-month high. Gold is trading up to $411. Silver is also trading higher. Last week I suggested a couple of commodity mutual funds that allow participation in the commodity group. One of our members asked about the availability of an Exchange Traded Fund. The answer is a yes and a no. I don't know of an ETF that trades commodities directly. But there are a few that are based on commodity-related stocks. And, not surprisingly, both are doing relatively well. Before we look at them, however, let's see where most of the commodity strength is coming from.
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ENERGY AND INDUSTRIAL METALS ARE CRB LEADERS... It should come as no surprise to read that energy has been the year's top commodity performer. Year to date, the energy group has risen by 46% (versus a CRB gain of 9%). But that's not all that's been going up. Industrial metals (like aluminum and copper) have gained 23%. Livestock markets have risen 7%. Precious metals have been relative laggards and have gained only 3%. Agricultural markets (mainly the grains) are the only commodity group to fall (-7%). The ETFs that hold mainly commodity related stocks are in Basic Materials and Energy.
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ENERGY EXCHANGE TRADED FUNDS ... Exchange Traded Funds (or ETFs) are baskets of stocks that trade on the American Stock Exchange just like individual stocks. They allow an investor to buy an entire basket of stocks with only one purchase. Two of the more popular energy ETFs are shown below. As I pointed out last week, however, the energy complex looks dangerouly overbought to me. Charts 4 and 5 show the 14 day RSI lines trading over 70, which is a sign that the group is in need of a rest. In other words, this probably isn't a good time to commit new funds to this sector. That's not true of industrial and precious metals however.
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MATERIALS SELECT SECTOR SPDR... The Materials Select Sector SPDR (XLB) includes stocks tied to basic materials -- or commodities. Its holdings include chemicals, aluminum, copper, gold, paper, and steel. It's one way of buying a basket of stocks that usually do relatively well when commodity prices are rising. For a listing of the top ten holdings of this and any another other ETF, go to amex.com. [The symbols for the nine sector SPDRS and the international ETFs can be found on the Stockcharts Market Summary page]. Some of the top holdings in the XLB are (in alphabetical orderp) Alcoa, Dow Chemical, International Paper, Newmont Mining, Nucor, and Phelps Dodge. Charts 6 and 7 give two views of the XLB. Chart 6 shows the ETF challenging its early 2004 peak. It's one of the few sector ETFs that's still trading over its moving average lines. Chart 7 paints a more bullish long-term picture. It shows the materials ETF having achieved a major bullish breakout late last year and trading close to its 1999 peak. Its relative strength line continues to show outperformance. That may be due in large part to rising commodity prices.
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COPPER LEADERS ... With copper prices having just risen to a new six-month high, it's no surprise to see copper stocks among the leaders in the basic materials group over the last week. Phelps Dodge is challenging its early 2004 peak near 90 and may be on the verge of achieving a record high. Its relative strength line has already broken out. Freeport McMoran Copper & Gold is benefitting from rising copper and gold prices. Two other weekly leaders are Alcoa and Newmont Mining.
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