Commodity ETFs Rally, DBB Takes the Lead

This week’s chart of the week looks at commodities, where base metals (blue line) and energy (red line) began to bottom just after the middle of February, about 2 ½ weeks before stocks put in a bottom. Interestingly, agriculture (green line) bottomed on March 2^nd, just before stocks found their bottom. Precious metals, which marches to the beat of a very different drummer during periods of economic stress, bottomed back on November 12^th and made its most recent high on February 23^rd, just as base metals and energy began to rally.

The chart below captures the action in four commodity sub-sector ETFs since February 17^th. The chart shows the base metals ETF (DBB) to be the strongest performer during this period. While DBB has faltered in the past few days, energy (DBE) has surged. Agriculture (DBA) has recently joined the bull party and with concerns about rising interest rates heating up, even precious metals (DBP) have started to rally as well.

It would not surprise me if 3-4 of these commodity sub-sector ETFs outperform the S&P 500 index for the rest of 2009. At the very least, they could provide some important portfolio diversification and a potential hedge against inflation.

Click to enlarge

[source: StockCharts]

Disclosure: Long DBB at time of writing.

Comments

[AndrewBaker:]

Commodity ETF can be good to hold and trade, but one recent problem is that they have tended to correlate too much to the stock indices of late. This means that you may buy in thinking an uptrend has started, and as soon as there is a drop in the S&P, DOW or other notable index, the commodity ETF falls too.

May 11 08:57 AM

[RiskReturnO...:]

Agreed. Commodity has not worked to diversify risk using standard Modern Portfolio Theory / asset allocation methodology.

The only way to "squeeze the alpha" out and "control the beta" is long DBA / DBC, and hedge with little dose of SDS (short SPY).

I've been using a ratio of 10:1 (10 DBA/DBC, 1 SDS), which effectively is 5:1, as SDS is double short, so my capial outlay is limited. If DBA drops 10%, stock market drops 25% (as experienced in last two medium term market down cycles), this portfolio would be down 5%.


On May 11 08:57 AM AndrewBaker wrote:

> Commodity ETF can be good to hold and trade, but one recent problem
> is that they have tended to correlate too much to the stock indices
> of late. This means that you may buy in thinking an uptrend has started,
> and as soon as there is a drop in the S&P, DOW or other notable
> index, the commodity ETF falls too.

May 11 12:29 PM

[dcb:]

It went from 11 to 15, back to 13 (I bought) back to 15 down to 14 today. the buy is about 13. or a tight stop, but the action isn't up right now for sure. the reason to watch this is because it should be leading. the fact that it has gone up, lost half, gone back up, and looks to be in the process of loosing half again should tell you something.
it tells me something funny is going on in other markets because thy aren't having those drops. f you buy now, stop out a bit below 14.00

May 11 08:55 PM