Keep your eye on the bouncing commodities ball

Here’s a five day chart of my favorite commodities stock shorts:

Click for sharper view. Source: Yahoo! Finance.

I nailed the commodities short at the peak in June, and sold a lot of my puts (GLD, GDX, TCK, NUE, X…) earlier this week as the sector made what may be the first of multiple panic bottoms in a bear market. I like shorting with longer-term puts, so I didn’t close all of my positions, but I built up a bit of cash. Lots of that went into retail and REIT shorts earlier this week, but some of it is waiting for this commodity bounce to get overextended.

This group fell 30-40% over the last ten to twelve weeks, so if this was indeed a meaningful way point, it could take up to eight weeks and a 25% rise for the countervailing bout of hope to play out. If the broader market is on the verge of a strong downdraft to beneath the July and March lows, which seems likely to me, commodities could get swept up in any waterfall and resume their decline sooner rather than later. This might not even be much of a bounce at all if broader market sentiment deteriorates quickly. Crashes do arise from oversold conditions – just ask Lehman shareholders.

The commodities markets are exhibiting a bit of negative correlation with the dollar, so I am also a bit short-term bearish on the currency. Any significant retracement would be another opportunity to get out of Euros, Pounds, Aussies, Loonies or precious metals (or short them again).

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