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You’ve heard me make such remarks in the past, but I’m going to spell it out for you real clear here. Do not fight momentum in commodities. Yes, peel off your long or short exposure as price action gets too far away from major moving averages, but do not fight the trend by taking the other side of the trade. There is nothing, and I mean nothing more dangerous than fighting momentum in a commodity market.

Commodities have no intrinsic value, they do not produce cash flow, they are worth whatever someone is willing to pay for them. Stocks and bonds on the other hand have intrinsic value, they are backed by a company which may or may not be making money which can be paid in the form of a dividend to shareholders. Because of this the momentum in stocks and bonds will always be hampered, to a certain extent, by underlying fundamental value. Yes these assets can escape the pull of fundamental gravity, sometimes for several quarters, but eventually the price and fundamentals of a company come back into equilibrium.

Please don’t tell me that crude oil really went from $145 to $35 because it was really worth that much less to consumers of the product. No, it made that move because of capital flows out of that asset, pure and simple.

Right now the grains and softs are on fire. Maybe it’s because of a big drought over in Russia, maybe it’s because of increased buying from China, maybe it’s one of 10 million other reasons. Frankly, unless you are trying to corner a commodity market, it doesn’t matter one bit. The price action should tell you everything you need to know. The momentum in these markets is high right now, do not fight them by trying to buy puts or through short sales, you will get your head handed to you.

That being said…I sold out of my long position in [[DBA]] today. No asset moves in a straight line and consolidation is needed at these prices. I would rather wait for a small pullback to reenter than ride through it. This was a trade, not an investment, I took some good money out of it and I’ll move on.

As I said, don’t fight long/intermediate term trends in commodities, you are likely to get run over. In no way am I saying to pile in at these prices, but there’s no reason to be getting short.

Source: Do Not Fight Momentum in Commodities Trading