I wrote a week and a half ago that the algos were moving into the commodity trade. [Jul 23, 2010: HAL9000 Starting to Get his Commodity Play On] I should have listened to myself. It looks to me like a huge allocation trade is happening and the big money is moving from the tech stocks they rode for a few months into anything in the CRB index (i.e. commodities).
Since the individual names mean nothing to HAL9000, I wish there was an ETF with the top 8-10 hedgie favorites. Instead I have to build my own basket so I am going to put together a 4 prong approach with hedge fund favorites Freeport-McMoRan Copper & Gold (NYSE:FCX), Potash Corp. (NYSE:POT), Walter Industries (NYSE:WLT) and Cliffs Natural Resources (NYSE:CLF). I picked these four, but feel free to throw a dart at any number of 100-200 commodity stocks and you will get an almost identical chart.
It is almost meaningless to tell you what they do, since it means nothing to HAL, but yhey are copper, fertilizer, coal (met and steam) and iron ore, respectively. I am streamlining here as a few of these names have other businesses. (Click to enlarge)
Since I am "chasing" here I am going to simply put 0.5% into each of the four to build a 2% allocation. Since they all have almost identical charts I will add and subtract from them as one big allocation trade, as if I were HAL9000 myself. If they all begin to break down below their recently cleared 200-day moving averages, you know the script... back to the curb they will go.
Disclosure: Long all names mentioned in fund; no personal position