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Could commodities finally be bottoming out?

by , 03 November 2015

There's no disputing that commodities have been on a sustained bear trend for the past few years.

This is thanks to a number of factors, including an economic slowdown, particularly in China, and a glut of oil.

This has led the CRB Commodity Index to fall some 47% since 2011.

But things could be changing…
 

Investors were slow reacting to the fall in commodities

 
Looking at investor sentiment towards commodities, this didn’t hit extreme levels until later on last year. That’s three years after commodities started their plunge.
 
Many contrarian investors use sentiment indicators. This is because when sentiment tends to hit an extreme, the opposite then tends to happen.
 
At the moment, sentiment is extremely negative for commodities, Dr Steve Sjuggerud in Daily Wealth explains. This shows that investors expect the bear market to continue.
 
But looking at what’s happened in the past, this isn’t what tends to happen. After an extreme negative reading there tends to be a lag before commodities bottom.
 

Once commodities start to rise, there are gains for the taking

 
Once they’ve bottomed, there tends to be some fantastic gains over a short period of time. For example:
 
  • After commodities bottomed in 1999, they went on to gain 53% in 13 months;
  • After bottoming in 2002, they went on to gain 30% in eight months; and
  • After bottoming in 2009, they went on to gain 33% in three months.
 
Of course, we can’t know how long it’s going to take for commodities to bottom this time, but interestingly the CRB Commodity Index has risen 5% from its lows in August.
 
This means the bottom could already be in. Whilst prices may pull back, going by what’s happened in the past, the bottom will happen soon.
 
Keep an eye on commodity prices and see if the new uptrend continues. If it does, there will be fantastic opportunities for savvy investors in commodities.
 
So there you have it. Why commodities could finally be bottoming out.
 
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Could commodities finally be bottoming out?
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