Don’t count on a big rally in commodities.

Yes, the “inflation/risk trade” is moderately oversold, but when oil, copper and the like start to fall, they can just slide straight down for months. I believe that the commodity rally of the past 15 months was just a dead cat bounce correcting the crash after the massive 2007-2008 bubble.

Now that we’ve had that correction (and then some when it comes to the metals), there is little reason for prices to remain elevated. The supply/demand situation today certainly doesn’t justify $3.00 copper or $1.00 nickel or zinc, and demand will be even weaker in a year when the construction bubbles in China, Australia and Canada are over.

Here’s a pattern I see in crude. Now that the uptrend (higher highs, higher lows) is busted (we made a lower low), all rallies may be short and weak:

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Copper’s uptrend is still technically intact but very weak(see RSI), and it could play out the same way:

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Of course, if a large rally does develop, it will just be more fodder for the bears. I’ve entered a short on copper at $3.13 today, and am prepared to add to the position. I’ve also just picked up some July puts on crude futures (expiry June 17). I don’t like near-term options, but these got cheap today and will pay off 25:1 if oil is $55 three weeks from now.

If another broad-based rally in risk assets develops, I’m covered with longs on stock futures. However, I would not be surprised to see stocks (and the Euro) rally for a while here while commodities decline. When trends start to exhaust correlations can break apart.

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One thought on “Don’t count on a big rally in commodities.

  1. Thanks for this analysis, Mike. I joined your short /HG and long near-month crude puts trades. I noticed the July puts stayed well bid even as crude was rallying and the VIX was dropping on the equity rally. Hopefully they know something the underlying doesn’t.

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