04/01/15   Brother, Can You Spare a Commodity?

Editor’s Corner

Ron Rowland

Every week, we show you a snapshot of where the strengths and weaknesses lie in the stock market. Our Edge Charts display the momentum of various stock categories broken down by sectors, styles, and global regions. The magnitude and numerical value of each bar represents an annualized calculation of each category’s current intermediate-term trend. For example, the Health Care sector is currently trending upward at a rate of 23% per year. However, it is not a prediction. Instead, it is more an indication of what is happening now.

Commodities are suffering. If we included a similar graphic for commodities and scaled the existing charts accordingly, the current extreme negative readings for many commodities would overwhelm the stock market data displayed. Crude oil prices have been headline news for months, and even casual investors are keenly aware of oil’s negative trend. The sector chart indicates the Energy sector is trending downward at about 10% per year. However, this category is comprised of stocks of energy-related companies, not oil itself. Crude oil is a commodity and is typically traded with futures contracts.

There are many exchange traded products (ETFs and ETNs) designed to track commodity futures prices, including oil and many others. The United States 12-Month Oil ETF (USL) is a popular way for investors to gain exposure to crude oil, and its intermediate-term momentum calculation is -59, nearly six times worse than the Energy sector. As bad as this may sound, it is not the worst performing commodity, as the United States Natural Gas ETF (UNG) is posting a score of -75. These steep declines are not limited to energy-related commodities. The iPath Bloomberg Sugar ETN (SGG) has a reading of -92 and iPath Bloomberg Coffee ETN (JO) comes in at -93. To put this in perspective, the coffee ETN (JO) has plunged 45% since last October, reflecting the 41% drop in coffee futures. Has your favorite coffee purveyor reduced prices in the past six months?

Although 90% of the commodity funds we track are in negative trends, there are a couple managing to post positive momentum scores. Copper and cotton are two such commodities, providing evidence in support of the “there-is-always-a-bull-market-somewhere” investing axiom.

Investor Heat Map: 4/1/15


Most sectors lost ground this past week but there was surprisingly little change in the relative strength rankings. Health Care remains at the top despite enduring a setback in the biotech stocks. Consumer Discretionary has a firm grip on second place as consumer spending continues to benefit from low energy prices. Real Estate maintained its third-place ranking, although there was a noticeable drop in its absolute strength. Consumer Staples has been the top performing sector since privately held H.J. Heinz announced its intention to acquire Kraft Foods (KRFT). As a result, Consumer Staples jumped four places higher in the rankings and pushed Technology, Financials, and Telecom lower. The Industrials sector was also overtaken in this process, but it managed to hang on to its seventh-place slot. The three categories at the bottom are still painted red, indicating that they continue to post negative momentum readings and are trending downward. This laggard group consists of Materials, Utilities, and Energy.


Relative strength favors smaller companies in the current market environment as capitalization size appears to be the primary delineation across the style ranking categories. Within each of the market cap stratifications, Growth is showing superior strength to both the Blend and Value designations. Given the preceding observations, it is understandable that Small-Cap Growth tops the rankings, as it has for the past ten weeks. Small-Cap Blend and Micro Cap swapped places with Small-Cap Blend gaining the upper hand this week. The Mid-Cap Growth and Small-Cap Value categories round out the upper tier in a nod to the market’s small company preference. Mid-Cap Blend moved ahead of Large-Cap Growth, which left the lower rankings a mixture of the Large Cap and Value categories. Mega Cap is at the absolute bottom, and this week it flipped over into a slightly negative trend.


As a reminder, our global rankings are based on unhedged ETFs that are priced and traded in US Dollars. Therefore, they reflect the performance of traditional international ETFs from the viewpoint of a US-based investor and include currency translation impacts. There are now many currency-hedged international ETFs on the market. When the US Dollar is gaining strength, these newer hedged products will typically perform better than the categories shown here. Conversely, in times of a weakening Dollar, the currency-hedged products will typically underperform the non-hedged products used here. The US Dollar gained about 1% against a basket of foreign currencies this past week, giving an advantage to currency-hedged international funds.

Japan is at the top of the rankings for a sixth week, but today China is posting an identical momentum score and claiming a share of first-place honors. China jumped two spots higher and is on a trajectory to be at the top of the list next week. Europe held steady in third, while EAFE slipped two places to fourth. The middle of the pack remained mostly unchanged in their relative order, although World Equity, the US, and Pacific ex-Japan all lost momentum. Emerging Markets managed to climb a spot, but in reality, its rise was caused by the UK’s dramatic fall. The UK posted one of the more dismal performances of the week, and it has now flipped over into a negative trend. This makes three global categories in the red, as Canada and Latin America continue to lag the field.


The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.


“The pipeline is already full, and there’s more sugar on the way.”

Anonymous sugar trader (3/28/15) on sugar prices falling to a 6-year low.


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