With all of the attention earnings season has brought stocks lately, most investors have been turning a blind eye to one of the most profitable markets in the world. I’m talking, of course, about commodities.

But like most investments, successful commodities trading requires knowledge of what’s going on in the market right now.

Buying oil or corn contracts without a deep understanding of where these resources stand is a sure way to lose. That’s why today I’m going to fill you in on where some of the most popular commodities sit, and how they relate to the stock market…

That last sentence may surprise you. Even though the stock market is a few levels removed from commodities trading here in Chicago, I’ve said it before and I’ll say it again: “It ALL comes back to commodities…”

Up, up and away Superman…Dow hits 10,000 again.

Stocks have made new yearly highs and the prognostication of the S&P 500 climbing back to the breakdown point of 2008 on the downside at 1200 seems very attainable. The technically driven stock market ignores the news and sees earnings only through rose-colored glasses.

For the week ending October 16 stocks kept the rally moving with new highs in all the major indices. The broad based S&P 500 was up 16 points, +1.5%, to lead the way followed by the Dow up 131 points, +1.3%. Technology struggled to keep pace with the NASDAQ only up 18 points, +0.8%, to finish the week.

The economic recovery in prices started in everything last March – to be clear the overall market and the commodities market are inextricably tied together.

The S&P 500, the stock market in general, has been a leading indicator for commodities. With stocks up over 50% from the lows it provides insight into future moves in other markets. The CRB Index, maintained by the Commodity Research Bureau, broke above the 267 level making new yearly highs last week. It’s now on target for the 335 objective, which represents a 50% rally in commodities.

Higher Oil prices (wow what a turnaround in the last two weeks from $65 to $80) are a good sign that the global economy is on the mend. In addition, it is supportive of stocks with Exxon and Chevron adding major points to the DOW sending it above 10,000.

Lower Gas Bills – 20% Off Sale

One market that my Resource Trader Alert subscribers have been keeping an eye on is natural gas.

This from Reuters:

“U.S. consumers are expected to pay lower natural gas bills this winter compared with last year due to above-normal gas supplies and cheaper energy prices, the American Gas Association said on Monday.

“Plentiful domestic natural gas supplies and lower wellhead prices will drive bills down this winter and provide relief for natural gas customers struggling in a trouble economy,” the AGA said in its annual winter outlook.

“Natural gas inventories have already hit an all-time high and are expected to remain at record levels by Nov. 1, which is the start of the U.S. heating season. Utilities built up those stocks throughout the year with gas that was much cheaper than in 2008.”

I get emails here at RTA asking why I’m in bullish positions in almost everything we trade. Well the easy answer is in the risk to reward. At historic low levels the upside is much greater than the limited downward potential. One market for me that is possibly setting up for a bearish play is Natural Gas. It used to be very tied to Crude but that relationship has changed dramatically in the last few years.

Gains in the Grains

The Grains, namely Corn and Beans have reverted back to fundamental news to move prices. New relative highs last week were a result of weather fears delaying harvest and hurting yields. When the near term forecast showed less extreme temperature drops a profit-taking sell off hit the trend Thursday.

After further analysis the 60 cent ($3000 per contract) run for Corn and over a one dollar move ($5000 per contract) in Soybeans can be traced to a technical breakout rally October 5th. That day also marks the month low for the S&P, a break in the Dollar Index below 77 and Crude finding support levels. So in reality this Grain rally is as much about global economic recovery and the weakening Dollar adding inflationary fears as the temperature outside tumbles.

As the stock market continues to climb – justified or not – commodities trades are going to keep seeing those bullish sentiments trickle over to commodities floors. Right now is as good a time as any to take the market to task for some serious short-term gains. And I’ll continue to be here to help you do just that.

It ALL comes back to commodities,
Alan Knuckman

October 22, 2009

Alan Knuckman

Alan Knuckman brings two decades of commodity trading experience to his role as managing editor of Resource Trader Alert, a weekly newsletter providing analysis and real-time updates on current and evolving market conditions. His options, futures, and currencies experience have made him a sought after commentator on issues shaping both hard (extracted or mined) and soft (grown or produced through the agriculture industry) commodities. He is a frequent guest on major international media outlets including CNBC, Sky News, MarketWatch, Bloomberg, Fox Business Network, CNN Money, and Reuters.

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