Commodities Setting Up For 2009 Rally

My tone yesterday was one sided for the near-term because I felt the rally was based on the Fed action, which was not necessarily a bullish signal for the market. After a rough open for the major indices they were able to work themselves back into positive territory before closing the day down 100 points or 1.1%. A sell-off in the last 10 minutes of trading shaved off nearly 100 points from the Dow and kept the Fed rally from continuing. The S&P 500 fell 8 points or 1.0% to 904; just above the important support of 900. The NASDAQ had the best day of the big three after the Fed announcement and outperformed again today despite the sell-off in Apple (AAPL). The index closed down 0.6% or 10 points at 1579, just below the 50-day moving average.

After a breakout of significance, such as yesterday’s move above the 50-day moving average on the Dow and S&P 500, the next step is confirmation. Ideally the days following a breakout will consist of a narrow trading range that keeps the index above the breakout level on a closing basis. Today the major indices were able to do just that - trade in a narrow range and hold above the breakout level on the close. Despite early weakness from the S&P 500 that drove it back below the 50-day MA, the index was able to rally back and close with a positive bias. The more days the indices are able to hold above the breakout, the higher the likelihood the breakout was real and more upside is on tap for the start of 2009. I will remain a skeptic at this point, though as I said yesterday, if the charts signal a breakout I will be more than willing to throw more money in the market and get out of all short positions.

A LOOK AT COMMODITIES

After years of boom, 2008 has not been kind to commodities of all kinds. From gold to oil to wheat, commodity prices have fallen as a global economic slowdown rips through every sector in the market. But what does 2009 hold for the beaten down sector?

Through today the iPath Dow Jones-AIG Commodity ETN (DJP) is down 38% for the year and off more than 50% from the July high. The ETN gives investors a broad look at the sector due to its exposure to most major commodity sub-sectors. Individual commodities such as oil have been hit even hard, falling from lofty levels just below $150 to a low of $40 today. It is somewhat mind bending what has happened over the last six months to commodities, but when a bubble bursts this is the end result. Yes, I just used the word bubble for commodities; however not in the same context as let’s say the technology bubble. When the tech bubble burst it was the end of companies that never turned a profit and had inflated prices based on future and unrealistic expectations - that is not the case with commodities.

Looking ahead into 2009 the commodity sector will once again become a great buying opportunity for a number of reasons. For starters, the global economic slowdown will level off and the “world is ending” panic will subside. This will force investors to realize that food will once again be in high demand as the global population grows. There is also the US Dollar that should continue the slide it began last month due to the actions by the Fed and inflation possibilities. Finally it comes down to supply and demand and for the equation to move to equilibrium the prices must rise.

What is the best way for clients to play the commodity sector if they choose to do so? The beauty of ETFs is that nearly every sub-sector within commodities is now covered. There is DJP if you are seeking a broad-based investment or if agriculture is your choice, the PowerShares DB Agriculture ETF (DBA) is an option. A commodity that I highlighted yesterday was silver, which is covered by the iShares Silver ETF (SLV).

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