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The Market's Measure
market's measure

Are Commodities Gaining on Stocks?

An eight-year swoon shows signs of ending.

Near my home there used to be a very popular waterslide park featuring “Excalibur,” an extremely steep tube slide that thrilled kids and terrified parents. Excalibur’s glide path is recalled in the graph below.

The chart actually depicts an index derived from an ETF price ratio. The ratio’s dividend is the Wisdom Tree Continuous Commodity ETF (GCC), a portfolio of 17 diverse and equal-weighted commodity futures; the divisor is that well-known proxy for large-cap stocks, the SPDR S&P 500 ETF (SPY).

Because of its weighting scheme, GCC gives more heft to agricultural futures and less to energy and precious metals contracts than other commodity index ETFs. It’s the relative strength of this broad-based commodities universe we see in the graph above. A rising line marks commodities as ascendant; a declining line means stocks are the more robust investment.

As you can see, the past seven years have been more terror than thrill for commodities, or investors in long-only commodities funds, anyway. But now, a momentum indicator is signaling that the fright may be coming to an end. The index’s 50-day moving average has crossed above its 200-day average—a so-called “golden cross”—for the first time in two years. Unfortunately for commodity rats, recent golden crosses tarnished rather quickly. These short plateaus along the index glide path should give us pause to use a little caution here.

The last two periods inaugurated by golden crosses lasted an average of 51 trading days. The most recent crossover occurred on May 30, so we’ll be out of the woods, so to speak, in mid-August. If there’s substantial daylight between the two moving averages then—that is, if the 50-day is higher than the 200-day, a trend reversal may be confirmed. Still, we’ll then need to make a qualitative assessment: Is the index rising because equities are weakening while commodities tread water or is there real strength in the futures market?

At present, it’s a combination of stock market wobbling and resurgent energy prices—rather than a broad commodity rally—that’s buoying the index. We’ll need a bit more time to tell if our ride on Excalibur is truly over.

Brad Zigler is WealthManagement’s Alternative Investments Editor. Previously, he was the head of Marketing, Research and Education for the Pacific Exchange’s (now NYSE Arca) option market and the iShares complex of exchange traded funds.

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