It’s no secret the majority of commodities markets have had a very tough year. Some of the hardest hit sectors have been the energies, grains, and metals markets. Over the last 9 months, some of these markets are down as much as 16%. Let’s think about that for a second and compare this to the performance of the S&P 500 which is up 6%. We can get a fairly good idea of where the relative strength has been among asset classes just by stating those figures!
At Dorsey Wright, we use a systematic based investing process focused on relative strength to help minimize our exposure to the under-performing asset classes around the world. This has allowed us to limit our exposure towards commodities, while maintaining exposure towards the stronger performing asset classes around the globe such as US Equities. However, this isn’t to say that down the road the commodities sector won’t come back into favor and having the ability to rotate back into this area should the tide turn is an added benefit of being a tactical investor.
Although the relative strength readings for the majority of commodities remain very weak, it’s worth noting some recent technical developments in the grain markets may be a sign the supply & demand relationship in the agriculture sector may be changing in favor of the bulls for the short term. We will discuss this in further detail below.
Corn Futures (Dec ’14): Point & Figure
In taking a look at the below point & figure chart chart, we can see there have been some positive developments which recently occurred on the Dec ’14 Corn chart. The triple top spread break out which was confirmed with the move above $3.60 currently has a measured move target of $3.96. Time will tell whether or not this target is achieved, but the ability of the market to take out overhead supply which had been rejected on two previous attempts is worth monitoring.
Soybean Futures (Jan ’15): Point & Figure
A similar technical development also recently occurred on the Jan’15 Soybeans chart. The double top break out which was confirmed with the move above $9.84 and currently has a measured move target of $10.60. Again, this re-enforces the idea that the supply of the market which had previous rejected prices has been overcome by demand in the short term.
Wheat Futures (CBOT - Dec ’14): Point & Figure
To round things out, lets take a look at the point & figure chart of CBOT Wheat to see if a similar situation has developed like it did in both corn and soybeans. Sure enough, a double top break out was recently confirmed with a move above $5.15. The measured move price target is currently $5.80.
Conclusion:
Above we have discussed some of the recent positive development on the traditional point and figure charts for a few of the commodities within the agricultural sector. In a beaten down asset class such as commodities, this may be a sign that pockets of relative strength are beginning to show up in corn, soybeans, & wheat when compared to other peers within the commodities asset class. The ability to gain exposure towards these sectors should their relative strength readings continue to improve is just another example in the benefits of following a tactical investment methodology.
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