WEAKER DOLLAR AND WEATHER GIVE COMMODITIES A BOOST -- NATURAL GAS AND COFFEE ARE BIGGEST GAINERS -- BUT UPTURNS ALSO SEEN IN ECONOMICALLY-SENSITIVE COPPER, OIL, AND SILVER -- BASIC MATERIAL AND ENERGY STOCKS ARE ALSO STRONG
COMMODITIES TRACKING FUND CLEARS 200-DAY AVERAGE... After lying dormant for the last year, commodity prices are finally showing some life. Chart 1 shows the DB Commodities Tracking Fund (DBC) surging to the highest level in four months and clearing its 200-day moving average. [The DBC includes 14 actively traded commodities]. One of the possible explanations for the sudden surge has been weakness in the U.S. Dollar. Weather, however, has also played a major role. The two strongest commodity groups have been agriculture and energy. Of those two, the strongest individual markets have been coffee and natural gas. Natural gas has benefited from this year's unusually cold winter. Coffee has gained nearly 50% because of a drought in Brazil. As a rule, weather-related rallies have less staying power than broader based commodity rallies based on signs of global economic strength. Other commodities showing new strength, however, have been crude oil, copper, gold, silver, cocoa, cotton, soybeans, and sugar. The upturn in most commodity markets bears watching because it would have important economic implications. For one thing, it would indicate that early signs of inflation are starting to surface (which isn't necessarily bad). For another, a lasting upturn in commodities could start to exert upward pressure on bond yields. The weekly bars in Chart 2 show the commodity ETF bouncing off chart support along its 2012 low. That's a logical spot for a rally to start. The circle also shows the DBC clearing a resistance line going back to 2012.
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Chart 1
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Chart 2
COPPER, CRUDE, AND SILVER CLIMB... As a rule, I pay more attention to commodities that are more closely tied to economic trends. In my experience, that's where the more reliable intermarket signals are given. And the news there is also encouraging. Chart 3 shows the First Trust Copper ETF (CU) trying to break through its September high which would complete a basing pattern. Chart 4 shows the United States Oil Fund (USO) rising above its December high. Copper and oil are two of the world's most economically sensitive commodities. A lot of attention has been paid to the recent rebound in gold which is a precious metal. Silver is more closely tied to trends in the economy since it is both a precious and an industrial metal. Chart 5 shows Silver iShares (SLV) rallying to a four-month high. All of which suggests there may be staying power behind this commodity rally. That should also benefit stocks tied to those commodities.
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Chart 3
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Chart 4
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Chart 5
BASIC MATERIAL AND ENERGY STOCKS SHOW RELATIVE STRENGTH ... Two of today's strongest market sectors are materials and energy. That's most likely tied to the rebound in commodity prices. Chart 6 shows the Energy Sector SPDR (XLE) having decisively cleared its 50-day moving average, which sets up a challenge of its December high. More importantly, its relative performance may also be starting to improve. The XLE:SPX ratio (top of chart) may be just starting to turn up after falling over the last four months. An upturn in its relative strength ratio would suggest that new money is starting to rotate into the energy sector. Chart 7 shows the Materials SPDR (XLE) already challenging its January high. The XLB:SPX ratio (above chart) has already hit a new high. Two of today's strongest stocks in that group are Alcoa and International Paper.
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Chart 6
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Chart 7
INTERNATIONAL PAPER IS TESTING OLD HIGH ... Chart 8 shows International Paper (IP) in the process of challenging its 2013 highs around 49. A decisive close above that area would represent a bullish breakout. Its relative strength line (above chart) is also showing improvement.
