11/19/14   Lackluster Bonds and Falling Commodities

Editor’s Corner

Ron Rowland

We’ve been focusing on equities most of this year, and for good reason.  Other major asset classes, like bonds and commodities, have not been as fruitful.  Bonds have the ability to be an exciting investment, but with bond yields stubbornly at historic lows, the upside seems very limited.  Commodities have potential, although this year they’ve been mostly disastrous.

There have been some trading opportunities this year for bonds as they moved between short-term overbought and oversold conditions.  However, those opportunities have been fleeting and didn’t offer much in the way of profit potential (without the use of leverage).  For example, the largest move for the iShares Barclays 7-10 Treasury ETF (IEF) this year was a 4.2% rise, including its monthly dividend, from mid-September to mid-October.  Your timing had to be perfect to catch that, because a two-day difference on the buy and sell would have resulted in just a 2.8% profit.  For more than half the year, the fund’s entire trading range was confined to a narrow 3.5% band.

Foreign bond funds have seen much larger moves than their domestic counterparts this year.  However, those moves have been mostly negative ones, primarily the result of currency fluctuations.  SPDR Barclays International Treasury ETF (BWX) fell 7.4% from the end of June through November 6.  For U.S. investors, any gains in bonds denominated in euros, yen, and other currencies turned to losses when converted back into dollars.  During the same period, the euro lost 9.8% of its value against the dollar and the yen dropped by more than 12%.

Like bonds, commodities are also a viable asset class.  Unlike bonds, the price ranges on commodities have been anything but narrow this year.  Unfortunately, most of their movement has been downward, making profits all the more difficult except for traders willing to engage in short-selling.

The United States Oil Fund (USO) is the largest crude oil ETF.  It is down more than 28% since mid-June, off 20% year-to-date, and 76% below its 2008 peak.  While this is terrible news for crude oil producers and their stock prices, it’s a boon for U.S. consumers.  The average price for a gallon of gas is $2.86 across the country today.  It was $3.65 just five months ago, and the extra cash in consumer pockets will likely find its way into retailers’ hands as we enter the peak shopping season.

Agricultural and base metal commodities are struggling right along with energy commodities.  PowerShares DB Commodity (DBC), a broad-based commodity ETF, is off more than 16% this year.  Bright spots in commodities have been fleeting.

We haven’t forgotten about bonds and commodities, but with a lackluster bond market and plunging commodity prices, our focus has been on equities.  Sharply moving commodity prices can affect other market segments, creating both winners and losers.  In the case of falling crude oil prices, energy producers are the losers and retailers could be the winners.

Investor Heat Map: 11/19/14


Although the market advanced this past week, a majority of sectors lost momentum.  Health Care recaptured the top spot and continues to provide much of the market leadership.  It has been ranked no lower than fourth for the past sixteen weeks.  Consumer Staples climbed two spots to second, and its ongoing presence near the top indicates the market rally has not caused the defensive posture of the market to dissipate.  Technology is one of the categories gaining momentum, which boosted its ranking four spots to third.  Utilities was the largest casualty of the week, falling from first to fourth.  Industrials lost momentum while still managing to improve its relative ranking a notch.  Real Estate fell from third to sixth, and Financials slipped two places to seventh.  Consumer Discretionary posted the largest momentum increase of any sector, although it wasn’t enough to change its ranking.  However, it has closed the gap that previously existed between it and higher ranked sectors, and it is now poised to move higher in coming weeks.  Telecom has been knocked around by political net-neutrality winds and still lags the field.  Materials bounced but remains mired by dropping commodity prices.  Energy keeps its last place ranking and its “only sector in the red” status.


The trend of increasing compression across the style rankings the past month reversed this past week.  Correlation often increases during times of market turmoil.  The effect of the mid-October sell-off and subsequent rally on the style rankings seems to bear this out.  As the rally matures, individual style categories are moving on their own strengths and weaknesses as opposed to moving in tight lockstep.  Large capitalization stocks are reasserting themselves and have gained the upper hand.  The market’s preference for Growth over Value enters its sixteenth week.  Large Cap Growth moved up two places to take the top spot, with Mid Cap Growth and Mega Cap following close behind.  Large Cap Blend climbed three spots to fourth, and Mid Cap Blend jumped five places to fifth.  Large Cap Value was in tenth a week ago and today sits right in the middle.  These moves pushed all of the Small Cap categories out of the upper half.  Small Cap Growth fell from first to seventh, Small Cap Blend plunged seven places, Small Cap Value dropped four places, and Micro Cap slid three spots to land on the bottom.


There are no changes in the rankings of the top five categories, and the number with positive momentum scores holds steady at four.  The U.S. keeps its #1 ranking for the fifth week as it continues to get help from a strengthening dollar.  There was a near three-way tie for second place a week ago, but they’ve separated somewhat today.  World Equity has second all to itself, Japan is in third, and China occupies fourth.  China lost momentum and is now in danger of flipping over to a negative trend.  Pacific ex-Japan holds down fifth place again, while the next five categories have all shifted their relative positions slightly.  Canada climbed two spots to sixth despite a weak Energy sector.  EAFE and the U.K. both slid a spot resulting from Canada’s advance.  Europe and Emerging Markets swapped places with Europe gaining the upper hand.  Latin America remains dead last.


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.


“In the grand scheme of things, consumers are in a much better place than they were this time last year.”

National Retail Federation Chief Economist Jack Kleinhenz


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