Mullooly Asset Management

Fiduciary Fee-Only Financial Planner | Investment Advisor in Wall, NJ

commodities

Bad Things Happen in Negative Trends

by

Subscribe: RSS

Here at Mullooly Asset Management we use a form of technical analysis called point and figure charting to manage investments. In point and figure, one of the main purposes the chart has it to help us identify trends. Whether we’re looking at a stock, index, mutual fund, ETF or commodity, the chart will show us its trend. On this week’s podcast, Tom and Brendan discuss how bad things happen in negative trends and relate that to the current weakness of commodities.

To begin 2015, many market headlines have been about commodities crashing. It seems like you can’t check any market related site without seeing a new post on crude oil. The commodity space is ripe with examples that embody the statement: bad things happen in negative trends.

So what do we mean by a negative trend? On point and figure charts we use two main trend lines: the bullish support line and the bearish resistance line. You can see them clearly identified in the chart below. These trend lines can stay in force for months or years at a time. When something breaks its bullish support line, it enters a negative trend. This is a huge deal!

The chart below shows crude oil. You can see that near the end of July/early August it broke through its bullish support line around $100 a barrel. The chart tells the story since then and we’re seeing prices in the $45 a barrel range today.

crude oil chart in a negative trend
This is a point and figure chart of crude oil
All of our point and figure charts are provided courtesy of our friends at Dorsey, Wright and Associates

As you can see on the crude oil chart, bad things have certainly occurred in its negative trend. The examples don’t stop there though! Other commodities experiencing big draw downs in negative trends include copper, gold, and silver:

  • Copper broke its support line at $3.20 in March 2014. The price has dropped over 20% since then, and today it’s trading around $2.64.
  • Gold has been in a negative trend since February 2013 when it was $1600 an ounce. Gold is currently around $1230 an ounce.
  • Silver entered a negative trend in September 2011 at $37 an ounce. Today it’s around $17 an ounce.

The headlines will have you believe that the commodity crash is a new phenomenon, but as you can see, many commodities have been in negative trends for a considerable time. Bloggers and journalists love to speculate about the reason why things like this are happening to commodities. They make for interesting articles, but the truth of the matter is that price matters most. We might find out weeks, months, or years from now what the real story behind the move in crude oil has been. That’ll make a fascinating book, but it won’t bring back the money investors have lost over the last few months.

We can avoid situations like the current one in commodities by watching the charts. When something enters a negative trend, it’s a big deal and needs to be handled accordingly. We’re not in the business of fighting trends here at Mullooly Asset Management. When the charts change, we change with them.

Oil Crashing: Just Because of Fracking?

by

Subscribe: RSS

People are starting to notice that it costs less to fill up their car at the gas station, and it’s due to the considerable drop we’ve seen in oil prices. A story line that’s been circulating centers around US fracking and its devastating effects on the price of crude oil. We’ll never know all of the reasons behind any security’s price fluctuation, but we’ve noticed something interesting here at Mullooly Asset Management. On today’s podcast, Tom and Brendan discuss the broad weakness we’ve seen from commodities over the last two years.

Is the decline in oil prices just because of fracking and over supply or is it something more? Here’s some interesting data we’ve collected from our friends at Dorsey Wright.

Commodity Returns 12/31/13 through 12/4/14

Crude Oil: -31%
Heating Oil: -30%

Cotton: -30%
Soybeans: -24%
Corn: -12%

Silver: -15%
Gold: -0.46%
Platinum: -9%
Copper: -15%

Commodity Returns 12/31/12 through 12/4/14

Crude Oil: -26%
Heating Oil: -28%

Cotton: -21%
Soybeans: -30%
Corn: -47%

Silver: -45%
Gold: -28%
Platinum: -19%
Copper: -20%

Perhaps we should be discussing the broad weakness displayed by many commodities over the last two years?

Commodities and their producers have been struggling over the last two years. Areas like Brazil and Russia are displaying very poor relative strength right now. Both are closely linked to their natural resources and the ability to export them. They’re not alone. Internationally, the commodity struggle is being exacerbated by a strong dollar environment.

Even within the US, areas that rely on the production of crops like soybeans, corn, and cotton aren’t doing as well as other areas of the country. We’ve also seen many MLP’s and high yield funds hit hard by the drop in crude oil prices because of their exposure to the exploration and production side of the oil market.

Commodity prices tend to show signs of inflation first, something the Federal Reserve is desperately hoping to see so they can raise short term interest rates. If the trend of commodities continue in this manner, we may be talking about deflation instead of inflation.

Like stated previously, we’ll never completely know what causes a security’s price fluctuation. We’re guided by point and figure charts here that track supply and demand. We leave the guessing game to others, but the drop in oil prices might not only be related to US fracking and over supply. It could be something bigger. Time will tell.

Investing in International Markets

by

Weekly Commentary for February 8, 2011

As you might have discovered, I have been in favor of selling a little lately in the stock market. Not a lot. The selling has been primarily in the emerging stock market areas.  Part of the reason is because this “unrest” around the globe has a nasty habit of flaring up global markets pretty quickly.

But another reason is because the charts of these sectors look pretty tired, and in need of a breather.

***** ***** *****

We have also seen better strength (lately) from the US Dollar.  When the chart of the dollar starts moving up, it really takes the air out of anything measured “against” the dollar (like foreign investments).

Does this mean we are “forever finished” with investing in the international markets? Not a chance.

For now, we are taking a little money off the table in this area.  This gives us a nice cash cushion — and ready funds if/when this market pulls back.

If you are relying on a blog post for specific investment advice, you are making a huge mistake. Please speak with an investment adviser before making ANY investment decisions.

If you do not have an investment adviser, we encourage you to contact Mullooly Asset Management at 732-223-9000, or through our website.

Under no circumstances should the content discussed on this post be considered specific investment advice.

***** ***** *****

What have we kept?

Small cap and mid-cap stocks continue to show strength. I am surprised to see so many in my industry continue to pound the table for large cap stocks. Maybe some day large cap stocks will outperform small and mid-cap stocks.  Maybe someday. Just not this day.

***** ***** *****

Commodities

Stocks (or better said, their underlying companies) have earnings to report every quarter and these companies frequently have news to report. But commodities do not have much to report.  So when commodity prices start to move in one direction, they tend to “over-do it.” As some of you learned in early 2008, commodities do not always act like stocks. If we begin to see a sell-off in commodities, we want to be quick to act.

What Do Rising Commodity Prices Mean For Investors?

by

Weekly Commentary for March 22, 2011

Lots of chatter about how Japan will be rebuilt, and who is going to benefit. Hold on, cowboy.

***** ***** *****

The speculation swirls around heavy machinery, and earth-movers for example. Others are talking up the idea Japan will want to get to work on nuclear power.  But a lot of folks are still missing the point.

***** ***** *****

So before folks do “the freak” about how long the wait might be to get a new iPad2, think about this:

Japanese dairy farmers are being told they cannot sell their milk. Or their spinach. And now fish are showing up with high levels of radiation.  Would you drink the water?  Japan, the third biggest economy, needs FOOD.

***** ***** *****

If you are relying on a blog post for specific investment advice, you are making a huge mistake. Please speak with an investment adviser before making ANY investment decisions.

If you do not have an investment adviser, we encourage you to contact Mullooly Asset Management at 732-223-9000, or through our website.

Under no circumstances should the content discussed on this post be considered specific investment advice.

Funny coincidence how commodities have been moving quickly to the top of the favored sectors list.

***** ***** *****

These point and figure charts continue to measure what is in demand, what is in supply. Point and Figure charts do not read the headlines, and do not speculate on what is (or is not) working. They track prices, including commodity prices. And people vote with their wallets. Every single day.

Which sectors are grabbing the lead tells the tale… Commodity prices (and inflation) appear to be going higher.

Commodity Prices Can Zig Zag

by

Weekly Commentary for April 12, 2011

Lesson #1: Commodity prices can rise sharply.
Lesson #2: Commodity prices can fall sharply.

July 11 2008: Crude trades at $147
July 18 2008: Crude closes at $129
This was a quintuple-bottom break.  Bad.

Two WEEKS after reaching $147:
July 29 2008: Crude trades at $120
This was also a support line break. Important!

Then, just over a month later:
September 2, 2008: Crude trades at $106
September 16, 2008: Crude trades at $91
The price of crude was sliced by one-third in 60 days

Two months later:
October 16, 2008: Crude trades at $70
Crude gets sliced in half in roughly 90 days.

If you are relying on a blog post for specific investment advice, you are making a huge mistake. Please speak with an investment adviser before making ANY investment decisions.

If you do not have an investment adviser, we encourage you to contact Mullooly Asset Management at 732-223-9000, or through our website.

Under no circumstances should the content discussed on this post be considered specific investment advice.

And it’s not just oil. Even gold, which (to some) never goes down, dropped from a shade over $1000 in March 2008 to six months later (October 2008) gold was bouncing around $700.

Commodities can zig and zag (quickly) because (unlike stocks) there is no dividend, which keeps some people invested.  Also unlike stocks, there will never be earnings reports which could drive prices up or down. There are also very few “fundamental” analysts talking about commodities.

Especially with commodities …when the charts change, we MUST change.

Economic Recovery Will Come At a Cost

by

When do you know an economy is coming out of a recession?

Watch the banks and commodities.

Hey, I don’t want to turn you into an “economics professor.”  You would need your own beanie hat with a propeller to do that.  But let’s cover the cocktail party “economics” conversation, so you can hold your own at a party.

There really is no “textbook” formula “how recessions end,” but patterns tend to emerge.

First, understand why recessions start in the first place.  Banks stop lending.  Money supply shrinks.
Like it or not, the world runs on credit.  When credit dries up, business evaporates.
How do you get the machine moving again?  Lending.
And all the lenders have “gotten religion” recently, and are sticking to traditional lending yardsticks.

Often, two completely opposite ends of the market tend to move first when recessions end.  They give “clues” things are starting to loosen up: banks and commodities… especially precious metals like gold and silver.

See, the rising price of precious metals can sometimes signal that we’re starting to see money back in circulation.  This would be a very strong indicator that the recession is coming to an end sooner than most people expect.   A rise in commodity prices tends to signal a pick up in economic activity.  And when you get enough economic activity, you get inflation.

A little inflation is a good thing.  Over the past year-plus, we have had no economic activity to speak of.

Now, there are plenty of people in the market today speculating that we will have massive inflation.  That’s because the government has been printing money like crazy.  And when you stuff this much cash in one end of the pipeline, at the other end of the pipeline, you should expect runaway inflation.

However (compared to other times), we have witnessed some massive price deflation in many areas of the economy: the price of your house, your stock portfolio and the job market.  So this massive “print job” the government has been doing (printing dollars) might actually just “offset” the price deflation we’ve seen.

Or not.
I suppose all of the pundits could be right!
When was the last time that happened?

See, the issue is not whether we MIGHT see runaway inflation or not.
The real question is: what are we going to do about it?

Over 23 years, I’ve learned the hard way.  Worrying about the future is really a waste of time.

We have to focus on what’s happening right now.

As strange as it seems, we need to set aside what might — or might not — happen a year, two years or even three years from now.
So what is happening right now?

We have seen a massive bounce back in the financial sector.  Banks are far from being healthy, or even back on their feet.  But the selling was completely overdone.  So they are bouncing.  On the other hand, commodities: energy, natural resources (and the countries that are rich in natural resources) are really starting to move.

When do you know an economy is coming out of a recession?

Watch the banks and commodities.
Here we go.

The other parts of the series:

The Economic Recovery of 2009, part I

The Economic Recovery of 2009, part II

The Economic Recovery of 2009, part III