COMMODITY INDEX INVESTMENT AND US STOCK TRENDS © Leo Haviland March 20, 2013

The net Index Trader position for each of the 12 commodities has always been substantially net long. The net IT position percentage relative to total open interest for the various commodities differs, in some cases substantially: cocoa, corn, cotton, live cattle and wheat net long IT percentages are not the same. In any event, the average net long IT position for the 12 commodities combined from 2007 to the present is about 24.8 percent of total open interest (3/12/ 13’s is about 23.7pc). Thus the commodity buy-and-hold for the long run alternative investment community is a very important factor within the commodity arena.

Moreover, notable changes in the net long IT positions for the combined dozen marketplaces, offer insight into (helps to confirm) overall commodity price trends. A substantial addition over time to net IT positions is a bullish sign for the commodities sector, whereas a significant slash in these net IT positions warns of (or confirms) a bear trip. Of course since net IT positions and their changes are only one factor influencing commodity price level and trend, players should not be dogmatic regarding the role and predictive potential of this marketplace indicator.

Since mid-2008, commodities “in general” (use the broad GSCI as a benchmark) in recent years often have traded in patterns somewhat similar to those in United States stocks (S+P 500). Substantial bull (bear) moves in US equities find parallels in those in the commodity domain. Therefore stock marketplace congregations should monitor IT position levels and trends.

Yet recall 2007-08. American stocks peaked in October 2007, about nine months before the one in commodities. Only after the final stock summit in May 2008 did equities and commodities trade closely together. The current longer run relationship probably also reveals divergence, but with the commodity peak to date arriving well in advance of one in the S+P 500. See “Commodities and US Stocks: Convergence and Divergence” (1/28/03).

The net long IT position since early February 2013 has started to decline, as have prices in the broad GSCI and in the great majority of commodities, although stocks have remained robust. Admittedly IT data availability beginning in 2007 does not constitute an extensive history. One should interpret it in relation to commodity (and especially) stock trends with caution. However, given the frequent parallels of important commodity and stock trends since mid-2008, further notable slumps in the net long IT position alongside price falls in the broad GSCI will warn (help to confirm) that price divergence between the commodities and American stocks will cease. If so, and thus as occurred in spring 2008 and thereafter, stocks and commodities probably will begin to fall together. A boost in net IT positions conversely would be bullish for the S+P 500.

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Commodity Index Investment and US Stock Trends (3-20-13)