Thinking Through Commodities Scenarios

You can click on Bloomberg Marketdata Commodities to see the latest results.

The selloff in commodities since early July is simply stunning. The same can be said for the current sell off and turbulence in the broader markets.

While I wish I had something insightful or helpful to write, at this point, I do not. Like everyone else, I am just watching the action. Those who claim that we have already reached the bottom or that they know how things will unfold during the next couple of weeks are lying to you. At this point, everyone is groping his way forward, hoping to latch on to something familiar once again.

If you are well diversified and unlevered (read, no or little margin), you should be able to watch this volatility with bemused detachment. You should start making your list of stocks or commodities that you would like to buy more. And if you have some short positions, think of when you want to cover your shorts.

If you are not diversified or are levered or both and are feeling anxious, then you should consider taking action to relieve the stress in your portfolio. Be careful, though, because people often sell at the very worst time. So if you are going to lighten your positions, try to think calmly and clearly and act opportunistically. Consider staging your sales over time. And if we get a rally, use that opportunity to reduce your positions.

As Doug Kass, general partner of Seabreeze Partners Management, Inc. and commentator for The Edge Column on RealMoney Silver (subscription required—part of TheStreet.com family), often writes, markets have no memory from day to day. Even though today the markets fell heavily, tomorrow's action could be the polar opposite. So make sure you are comfortable with your positions and have thought through potential scenarios.