Behind the blowout in commodities

The S&P 500 Index (SPX) has performed well this year and is up over 19% on the year as of July 31st. The Federal Reserves accommodative stance on monetary policy may be one of the reasons for this action.

I assume this to be true due to the sharp but short correction and rise in interest rates we had in June. The markets came right back and hit all time highs in July as the Fed verbally backed off from comments about tapering bond purchases.

I am seeing many breakouts in stocks and I am pursuing the purchase of these stocks while keeping my eyes peeled for a possible correction and reversals of stocks that have had big run-ups.

One area of concern for me about this current uptrend in the general stock market averages is the selloffs in the commodities space. One of the latest victims of falling commodities prices is the fertilizer and potash group with stocks like Mosaic (MOS), CF Industries (CF), Potash Corp. (POT) and Intrepid Potash (IPI) experiencing swift and severe drops in July.

There have been news reports that Uralkali a Russian potash cartel split up due to the partners cheating on quotas. This news sent potash prices plummeting along with many fertilizer and potash stocks.

Now this one sector may not seem to mean much of a story for concern, however I see this as yet another commodity sector that is getting hit hard.

This smells of a global slowdown as we have gold, silver, steel, aluminum and countless other commodities down in the dumps. I believe the real reason the cartel broke up and that gold and silver and other commodities have fallen is the need for money and income from various countries and businesses.

The commodity that is holding up well is currently oil. The potential collapse of oil prices can confirm to us that a major international slowdown is taking hold. I believe this slowdown is happening already and I am keeping track of petroleum stocks and oil prices.

Right now oil prices are strong for whatever reason and I certainly will not fight this trend even though I am concerned about a potential drop in prices due to it being in the commodity sector. The transportation sector can also offer clues to the viability of oil prices however I chose to use price directly for my investment decisions.

What we are looking for next is if the United States economy can pull the world out of this slowdown or will it be pulled down by it. One outcome may be that the U.S. greatly benefits from the printing of dollars during such a deflationary period.

The outcome of this money printing further out may not offer such a bright outcome. As of now however the “gold and silver bugs” and the “collapsing dollar prognosticators” are being punished for not yielding to the current trend in these markets.

There can be several other outcomes to falling commodities prices as well. Another outcome can be the selling of assets that have risen to switch into fallen sectors or “value” plays as viewed by value investors and value funds.

I am keeping watch to see if any of the fallen commodities stock groups begins to turn into an uptrend and if a rotation occurs. There are many beaten down sectors and countries to choose from and I am looking for any sign of a major trend change.

A hard correction in the general American stock market averages would be helpful here in my opinion because it would ring out the excesses of rising “not so special” companies and allow the powerful stocks to build bases and provide for new entry buy points.

Right now the internet sector is strong with stocks like FaceBook (FB), Yelp (YELP), Pandora Radio (P) and many other internet stocks on uptrends. Some Chinese stocks seem to be attempting to turn up and I are looking at those as well. The markets are moving in a dynamic manner and I am attempting to get some profits from these moves.

Although I am interested in many stocks, the trends are changing rapidly and I do not want to be held to an idea that has played out by the time you the readers have read this in a few days. Any stock can reverse its short or long term trend at any moment regardless of the fundamentals or macro economic news. This is one of the things I look for and hope to profit from.

The investments discussed are held in client accounts as of July 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.