Commodities Recap For The Week Of Oct. 12, 2018

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About: ProShares VIX Short-Term Futures ETF (VIXY), Includes: BCI, BCM, CMDT, COM, COMB, COMG, COMT, DBC, DDP, DEE, DJCI, DJP, DPU, DYY, FAAR, FTGC, GCC, GSC, GSG, GSP, PDBC, RJI, SVXY, TVIX, UCI, USCI, UVXY, VIIX, VMAX, VMIN, VXX, XXV
by: Andrew Hecht

Summary

Stocks tank in a long-overdue correction as interest rates crack the equity bull.

Gold rallies in what could be a flight to quality or fears of inflation.

Oil corrects from recent highs, but natural gas remains above its breakout level.

Sugar and coffee continue to climb.

The dollar moves lower and digital currencies decline.

The Story of This Week: Volatility Returns to the Stock Market - I'm Taking Profits on VXY

It was an ugly week in the stock market. October has a long history as a month where stocks come under selling pressure, and the signs were on the wall. The ongoing trade dispute between the U.S. and China continued to escalate over recent weeks. The International Monetary Fund warned that protectionism was leading to "dark clouds" over the global economy. Interest rates in the United States have been rising. At their September meeting, the Fed hiked the Fed Funds rate by 25 basis points and economic data points to the central bank following through on their pledge for another one-quarter of a one-percent rate hike at their December meeting.

Moreover, the program of allowing the legacy of quantitative easing to roll off the Fed's balance sheet continues to put upward pressure on interest rates further out along the yield curve. As rates on medium and longer-term maturities rose, the U.S. bond market hit the skids in September. This month the 30-year Treasury bond fell to its lowest level since 2014 at 136-14. The stock market ignored higher rates and "dark clouds" over trade for a time, but this past week the chickens came home to roost. The DJIA fell by over 800 points on Wednesday and another 545 points on Thursday. On Friday the index rose by just under 290 points. Other indexes in the U.S. and around the world followed as a long-overdue correction has descended on equity prices. No one should have been caught by surprise by the selling in stocks. My question was, what took so long?

Those who read my articles on Seeking Alpha know that I had been advocating buying volatility related stock market ETF products on dips over recent weeks. The VIX index dipped to its most recent low of 11.34 on October 3. This past week, the VIX hit a high of 28.84 on Thursday. The volatility index on the S&P 500 index acts like a short-term put option on stocks during sudden and violent declines. My favorite product for short-term trading is the ProShares VIX Short-Term Futures ETF product (VIXY).

Source: Barchart

As the chart shows, VIXY rallied from a low of $21.27 on October 1 to $31.74 on October 11. I did not buy the low in this product, nor did I sell the high. VIXY moved up by over 49% over the ten-day period, and I caught a large piece of the gain by purchasing on dips on a scale-down basis and selling scale-up as the selling frenzy hit the stock market. I am now on the sidelines in the volatility index. VIXY acts like a short-term put option on the stocks market. The fund summary for the ETF states:

The investment seeks results (before fees and expenses) that, both for a single day and over time, match the performance of the S&P 500 VIX Short-Term Futures Index for a single day. The index seeks to offer exposure to market volatility through publicly traded futures markets and is designed to measure the return from a rolling long position in the first and second month VIX futures contracts.

The top holdings include the first two active month VIX futures contracts:

Source: Yahoo Finance

VIXY is not appropriate for long-term positions as the decay in the product can be brutal. However, as a short-term trading tool, VIXY acts as a put option on the stock market and this week it paid off big time for those who bought the dip.

When it comes to commodities, higher interest rates can be a paradox. If real rates rise, it increases the cost of carrying long positions and inventories which tends to weigh on raw material prices. This week we saw crude oil move lower and copper and base metals exhibit price weakness in response to higher rates and the potential for a risk-off period in markets across all asset classes. However, the price of gold took off to the upside on Thursday reaching its highest price since early August at $1230 per ounce. Gold is the ultimate inflation barometer, and the yellow metal could be signaling that the economic condition that eats away at the value of money is a clear and present danger after a decade of accommodative monetary policy.

Meanwhile, the Fed has its eye on inflationary pressures as it hikes rates on a short-term basis and continues on its path of reducing its swollen balance sheet. President Trump has unleashed a Twitter storm at the central bank saying they are too tight and have gone "crazy" and is "out of control." Trade issues, a significant stock market correction, a standoff between the President and his appointee at the Fed, and a world that is always providing surprises is a potent cocktail for price volatility in markets across all asset classes. On Friday, stocks recovered to end a wild week. Trading rather than investing is likely to produce optimal results in the current environment.

Highlights in Commodities:

  • Gold posts a 1.36% gain on the week as fear and uncertainty grip markets
  • Silver moves 0.10% just lower since the last report
  • Platinum posts a 1.88% gain for the week and was trading at a $382 per ounce discount to gold
  • Palladium moves 0.35% higher on the week and closes at the $1060 per ounce on Friday
  • Copper gains 1.36% the week
  • Iron ore moved 2.16% higher on the week
  • The BDI moves 2.51% lower since the last report
  • Rotterdam coal falls 8.62% on the week in sympathy with the correction in crude oil
  • Lumber falls 8.62% on the week and closes at the $320 level on the November futures contract
  • November NYMEX crude oil corrects 4.04% lower
  • December Brent crude oil moves 4.34% lower but Iran remains in the background
  • The premium for Brent over WTI in December closes the week at the $9.10 down 74 cents on the week
  • Gasoline falls 6.91%, and heating oil moves 2.97% lower since last week on the November futures contracts
  • The gasoline crack spread plunges 22.58% while the heating oil crack moves 0.81% higher on November futures as products reflect seasonal influences
  • Natural gas makes a new contract high at $3.368 and gains 0.57% on the November futures contract on the week. The EIA reported an injection of 90 bcf into storage on Thursday for the week ending on October 5
  • Ethanol moves 0.98% lower on the week
  • November soybeans move 0.17% lower on the week in post-WASDE trading
  • December corn rises 1.49% on the week after the USDA report
  • CBOT wheat posts a 0.72% loss on the week. December KCBT wheat trading at a 7.00 cents premium over CBOT wheat up 3.75 cents from last week
  • March sugar futures up another 3.48% on the week
  • December coffee rises 6.98% since last week's report and closed at over $1.1650 per pound
  • Cocoa moves 6.72% higher on the week
  • Cotton rebounds 2.98% on the week after WADSE
  • FCOJ futures gained 0.66% on the week
  • Live cattle fall 1.67% since last week on December futures
  • November feeder cattle down 2.28% since the previous report
  • December lean hog futures move 4.43% lower on the week
  • The December dollar index futures contract moves 0.41% lower as interest rates rise
  • December Long-Bond futures trading at around 138-12 up 1-06 for the week as the implosion in bonds threatens equity markets
  • The Dow Jones Industrial Average closes at 25,340 on Friday, October 12 down 1,107 points on the week as stocks plunge during the week. The VIX moves 6.28 higher and was trading at 21.31 on Friday
  • Bitcoin closes at $6,280.42 Friday down $272.21 or 4.15% since last week
  • Ethereum moved lower to $197.35 down 11.39% since the last report

Price Changes for the Week:

GSG closes the week at $17.83 per share, down 48 cents since last week's report on weakness in crude oil.

Source: Barchart

GSG is the iShares S&P GSCI Commodity-Indexed Trust which represents a diversified basket of commodities futures contracts, has net assets of $1.42 billion and trades an average daily volume of 334,596 shares.

Disclaimer: Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.