By Kris Sayce, editor, Casey Daily Dispatch
In recent weeks, we’ve covered how September is the worst month of the year for stocks.
So if you’re worried about a market decline, history suggests that September is the likeliest month for it to occur.
However, even during bad months, not everything falls.
That was the case this September. While sectors like tech had a terrible month, other sectors did well.
One sector in particular had a roaring time.
That sector? Commodities.
Today, we’ll look at whether that trend will continue, or if like many booms, this one is about to come to a crushing end.
We’ll share one expert’s take on this below…
If this is your first time reading the Dispatch, welcome. If you’ve been here before, welcome back.
At the Dispatch we have two goals:
To introduce you to the most important investing themes of the day, and
To show you how to profit from them.
We do this by showcasing ideas from our in-house investing experts: Dave Forest and Nick Giambruno. And from the founder of our business, Doug Casey.
And from time-to-time, we like to add some technical analysis to the picture. This gives us an idea of how others in the market are reacting to asset prices. That’s what we’ll do today.
There’s a Lot to Learn From This Index
The technical analyst we always turn to is Imre Gams. He’s traded the markets for years, and he’s traded pretty much every market there is. On top of that, he helps train and mentor new technical analysts. His experience means that he can always give us a good take on where markets are heading next.
Now, while most of our focus at Casey Research is on the fundamental side of investment research – company financial reports, industry analysis, drilling results, and so on – technical analysis is a great way to fine-tune your entry into the market.
That’s why we turned to Imre to get his take on one of our favorite sectors at Casey Research – energy. But rather than looking purely at energy stocks or the price of individual energy commodities… we asked Imre if he could do a real “top down” approach by first looking at the broader commodities sector.
(Imre will share his energy-specific outlook next time.)
The reason for looking at the broader commodities sector is that commodities can often move in tandem. If all commodities are hot, it can generate excitement in the sector and drag everything along with it. If the sector is stone cold, then nothing – absolutely nothing – will be enough to get investors excited.
In a moment, we’ll show you a chart that displays that perfectly.
But first, what’s Imre’s take from a technical perspective? Here’s what he told us:
As you know, September is often a bad month for stocks. This September was no different. The good news is that October through January is historically the best performing stretch of the year.
That means it’s a great time to find the best sectors to invest in. And my analysis tells me that one of the best places to invest your capital is in the energy sector.
And whenever I want to invest or trade in energy, one of the first price charts I’ll analyze is the CRB – that’s the Commodity Research Bureau Index.
As background, the CRB is a great way of seeing overall commodity price action in one place. The index is made up of 19 commodities broken down into four groups: Energy 39%, Agriculture 41%, Precious Metals 7%, and Base Metals 13%.
Because energy commodities make up such a heavy weighting in the CRB, Imre says its price chart can tell you a lot about the sector.
More Gains to Come, But a Correction Could Come First
Of course, this isn’t the first time we’ve shown you this index. Imre showed you a chart of the CRB on July 28. At the time, he told us:
I’ve also marked an important multi-year high going back to 2018. This level is at 206.56. After staying well below that level for the past three years, the CRB traded through it in June this year.
Breaking through that level was the basis for why Imre believed that the technicals suggested a continued rise in commodity prices.
So how has the story developed since July? Here’s an updated version of the CRB price chart.
Just one note before we go on. We mentioned before how a negative attitude to commodities can bring down the entire index. That was pretty much the case (with a few exceptions) from 2011 to early 2020.
But after the COVID-19 rebound… and after breaking through Imre’s key level of 206.56… the CRB hasn’t looked back.
Right now, the index is currently trading at 235.79. And according to Imre, there should be more gains to come. So how does he see it all shaping up?
The next objective for the CRB is 248.5, which coincides with a significant low that the index put in all the way back in May 2010. Before we get there, however, I wouldn’t be surprised if we first see a short correction take place.
At this point, the CRB is a little bit stretched out and its upward momentum is at risk of temporarily fading. Notice how far away the price is from its long-term moving averages (red and blue lines). Whenever this phenomenon occurs in a market, investors should begin to take a more cautious stance.
It doesn’t mean that the market is going to reverse on a dime, but it does suggest that some mean reversion is close at hand.
So, how can you play that?
Here’s How to Play This Right Now
According to Imre, if you already own commodities-related investments, including energy, there are a few strategies to consider.
One strategy, especially for traders, is to ensure you have a stop loss in place. Another approach is to consider taking partial profits. This is one of the cornerstone strategies at Casey Research. Whenever one of our picks more than doubles, we take money off the table.
We recommend investors sell enough to take out their initial investment, and then leave the rest to run. We call that a “Casey Free Ride.” Effectively, it leaves you with no risk on your initial investment. Even if the price plummets, you’ll still come out ahead.
But the aim, of course, is that the remaining investment will go on to make bigger gains. Remember, Imre sees any potential drop as just a short-term correction… something that happens during every bull market.
And it’s during those short-term corrections that investors have a great opportunity to buy at a discounted price. We’ll continue to watch commodities, and especially energy, with keen interest.
Editor, Casey Daily Dispatch
P.S. Short-term corrections are great opportunities for speculators. When markets turn volatile, it often shakes out nervous investors. That’s when the best investors can buy great stocks at a discount.
That’s why Dave is such a big advocate for a little-known financial asset that allows investors to do just that. What’s best, it allows investors to invest a smaller amount in the market, while still getting the benefit of all the gains.
It’s what makes Dave’s mantra of “unlimited upside, capped downside” so appropriate here. The financial asset in question is warrants. For full details, go here.