Commodities stocks have two primary drivers, commodities prices and the general stock markets. When both are doing well, commodities stocks thrive. But when both are weak, commodities stocks amplify their losses as we’ve seen during the sharp universal correction since late April. The resulting deeply-oversold commodities stocks have created an outstanding buying opportunity today.
In order to understand why commodities stocks have been beaten down to such great bargains, we have to explore the technicals of their primary drivers. Commodities prices are best quantified through the Continuous Commodity Index (CCI). It is the traditional old-school equally-weighted geometrically-averaged CRB index. Today’s version of the “CRB”, created in July 2005, is dominated by crude oil and uses a brand-new methodology not comparable to the decades of classic CRB history.
The best gauge for the state of the general stock markets is the flagship S&P 500 (SPX). It is the biggest and most-important stock index in the US (and indeed the world). It is far superior to the Dow 30, much broader and it weights its components by market capitalization (as opposed to the Dow’s antiquated and misleading share-price weighting). Thus professional traders zealously follow the SPX’s progress.
All investors and speculators interested in buying commodities stocks low and selling them high need to monitor the CCI and SPX. Their technical states on an ongoing basis show whether commodities stocks are oversold and likely to rally or overbought and likely to retreat. And today, for the first time in a year, the pendulum has swung deeply into the oversold region of this buy-low-sell-high continuum
We’ll start with the CCI, because the influence of commodities prices on commodities-stock fortunes is the most obvious. Commodities stocks naturally explore for and produce commodities. The higher commodities prices go, the more profitable they are to produce. And the more profitable the producers become, the higher the markets bid up their stock prices. Thus a higher CCI translates into better commodities-stock prices, and vice versa of course.
This first chart renders the CCI in blue along with some of its key technicals. In addition the Relative CCI is shown in light red. It expresses the CCI as a multiple of its critical 200-day moving average. This helps define overbought and oversold levels in comparable terms over time, illuminating excellent entry and exit points. This is based on my Relativity Trading system,…
