I have been getting some amazing results with my Statistical Indicator Analysis (SIA) in reference to stocks and I wanted to see how SIA would work with commodities. For those of you who don’t know what SIA is, I would welcome you to read this article first before proceeding.
SIA has proven itself a useful tool to complement my work on free cash flow, but when analyzing commodities it could be an even more powerful tool, in that commodities have no earnings, no balance sheets and no cash flow statements to analyze, thus the only way to analyze them is through technical analysis or price action (of course macro events play a major role as well, but those cannot be quantified).
But what if you are long term investor or want to hedge for your business and want to go beyond the 200 day moving average> Your options are rather limited, because commodities are basically in the realm of the short term trader, so what can you do? Well I analyzed the Fuel Oil Industry using my SIA and came up with some amazing results.
I was able to get data for most of these fuel oils going back to 1986 and if we go forward 3650 trading days we end up with #1 trading day (on the horizontal axis of the chart) beginning in the year 2000. So we have 10 years of concrete SIA data to work with and that should be adequate.
I was able to analyze four different fuels for this article, and they are as follows.
The following is a chart for WTI Crude Oil:
As the chart clearly shows a pretty amazing thing happened with crude oil as it went up to $145.31 on trading day # 2130 (July 3, 2008) and on that day the SIA was $35.37, so Crude Oil was trading at 4.10 times its SIA. In the stock market I usually like to sell at 2.0 times SIA, so this was twice my sell price.
So what would have happened if you bought crude oil on that day and went long? Basically you would have lost -74% on your investment as oil prices fell off a cliff and kept dropping until February 23, 2009 when they broke below the SIA line (Red Line) for exactly one day. That’s right, oil fell below its SIA on February 23rd only and has never been down there again . So my SIA called the bottom in crude oil and the indisputable proof is in the chart before you.
And in that article I posted this SIA chart:
As you can see on #8155 the stock broke its SIA for exactly one day as well and then shot up.
Is this a crazy coincidence or am I onto something here? IBM hit its low on November 20, 2008 and Crude Oil hit its low on February 23, 2009, so the dates are far apart from each other, thus the date could not be the reason. IBM has nothing to do with crude oil so that could not be the reason either.
So what would happen if we put up the charts for the other fuel oils and see what happened with their historical SIAs? The following may just surprise you as what happened is truly amazing.
Chart of U.S Gasoline prices:
Broke its SIA line for 10 days on December 2, 2008 and never looked back.
New York Heating Oil:
Came within $.08 cents of its SIA and then shot up on February 18, 2009.
Texas Propane Spot:
Broke below its SIA on February 18, 2009 and stayed around it until March 16, 2009 and never looked back.
So maybe some of these fuel oils are linked to Crude Oil and there is a direct correlation in their prices, but it seems that SIA could be a very useful tool for those doing commodity investing. Of course I have only investigated a few commodities so far, but it is very difficult to get your hands on the long term daily trading data necessary to do this analysis. I have been looking for daily closing prices for spot gold and silver for two days now and they are nowhere to be found. If anyone has access to any daily commodity prices for any commodity going back to at least 1986 all the way to today, I would love to try out my SIA on it and publish the results.
Before closing I would like to go back to the Crude Oil chart one more time and direct your attention to trading day #418, which was when crude oil broke below its SIA on November 5, 2001 and stayed there until February 22, 2002 and proceeded to go from $20 a barrel to $145.31 for a gain of 626% in just six years. Therefore as I have stated previously, when one buys at par with SIA or at a discount to it, the gains can be substantial and the farther you go away from it the greater the risk becomes. At crude oil's current SIA of $44.74 and with my rule of thumb of selling at 2.0 times SIA, it could mean that crude oil would be a sell at $89.48. The historical price to SIA average for crude has been 1.88 times (the mean of 2752 trading days) so selling at a SIA of 2.0 could be a prudent move.
Disclosure: Long IBM, No Position in any of the commodities mentioned in this article.