October 22, 2009
Commodities Are Attractive Here
We've had a good sampling of earnings so far, a big dose of confessionals comes this week. All in all, we've seen a decent showing. Some of the follow-up price action was due to a previous runup (as was the case with IBM). For the most part the results and guidance have been positive. Sentiment still continues to be the driver of action.
Short-term Overbought
Even with Friday's pullback the markets are significantly overbought in the interim. Now, that's not necessarily a bad thing, but you wouldn't want to get on board with new trades just yet. Technically, there are some areas of strength that beg for a look on the next pullback. Financials may have run ahead and the giddiness is being sold. That's ok though, as there may be opportunity. The financials have been crushing estimates. Technology has mostly been mixed but once again a pullback from overbought.
The CBOE Volatility Index (VIX) shows us a level not seen in over a year. It has been consistently pressing lower and reached under 21 to close the week. If it stays under 25 that would bode well for the bulls and eventually get it pulled under 20 before too long. We generally worry about too much complacency and that could be the case here, but until it turns the other way we have to focus on the trend.
Commodities and the Greenback
This coming few months could be big for commodities. Oh sure, gold has had a big run the last six weeks, up nearly 15%. Silver has also been on a roll, but not as much as gold. Oil has been on the move lately, and recall I spoke of the $75 level as stiff resistance recently, but once that broke we would see $90 very soon (closed Friday just under $80). Naturally, much of these moves in commodities are highly correlated with a falling dollar. While we've seen (and heard) about a tanking dollar and the negatives, let's remember where it came from. Last fall, the greenback surged on the 'safe haven' buying in the face of a massive storm. That's been repealed. In fact, the buck is just back to where it was last summer, when the markets were reaching highs! Lacking a catalyst the dollar probably not going much higher but may languish and bottom for awhile, until the Fed considers tightening. That could be months away.
So for now, a weak dollar trade is likely good for equities in commodity-related sectors. Some of the groups that look attractive include steels, metals, oil services, drillers, refiners, fertilizers and gas (SLB, RIG, NOV, DO, DVN, X, MT, MTL, SUN, VLO, PBR, HES, VALE, CLF, FCX, AEM, GOLD, RGLD, ATI, RTP, BHP).
Trade Well,
Bob Lang
ABOUT PRICE HEADLEY
Price Headley is the founder and chief analyst of BigTrends.com, which provides daily stock and options recommendations and education. Timer Digest recognized Price and BigTrends.com among the Top 10 stock market timers for 2000. Price has been widely quoted by Barron's, CNBC, The Wall Street Journal and USA Today. Price is also the author of the new book, Big Trends in Trading: Strategies to Master Major Market Moves.
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