Global PMI And Commodities: The Trend Is Your Friend

by: Frank Holmes

Manufacturing around the world weakened in June, according to the JPMorgan Global Manufacturing Purchasing Managers' Index (PMI). Its reading of 48.9 was the lowest in three years and the first dip below 50 since September 2011. The current reading is also below the three-month moving average for the second month in a row. As you can see on the chart, PMI crossed below the three-month in May.

Global PMI lowest reading in three years

While Europe, China and the U.S. were primarily responsible for the slowed activity, we believe the trend is your friend. In April, global PMI crossed above the three-month moving average, and historically, when a "cross-above" has happened, it's signaled higher prices for many commodities. Take a look at the chart below which shows the following:

Ninety percent of the time, copper rose 10% over the following three months. Eighty-five percent of the time, West Texas Intermediate oil has also increased. Its median three-month change has been an increase of 11%.

Materials and energy were also positively affected, with modest results: When the PMI crosses above the three-month average, 70% of the time, the S&P 500 Materials Index rose, with a median return of about 3%. The S&P 500 Energy Index had a median three-month return of about 5%, with an 80% chance of the three-month change being positive.

Historical 3-month returns and probablility when global PMI crossed above 3-month moving average

Using history as a guide, this suggests that by the end of July, we could see strength in these commodities and energy and materials stocks. Although volatility and uncertainty rule the markets these days, we believe that the world's central bankers are taking note of slowed activity and will act if deemed necessary.

The Purchasing Manager's Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500. The S&P 500 Materials Index is a capitalization-weighted index that tracks the companies in the material sector as a subset of the S&P 500.

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

Disclaimer: The trend is your friend only if your portfolio is "resourceful" enough to benefit. This article showed how U.S. Global Investors' Global Resources Fund strengthened a diversified portfolio over the past 10 years.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

Diversification does not protect an investor from market risks and does not assure a profit.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

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