What the Investor Sentiment Shift
Means to the Commodity Trade
The correction we’re now experiencing in commodities is exactly what we needed. Everything’s had a great run and the trading action was just a little too much too fast. I personally would love to see the prices of oil, gold and silver retreat another 15% to 20%. Lower oil prices help the economy and lower spot prices for precious metals help with raw material costs and provide a more opportune entry point for new positions.
If it’s one thing I’ve learned over many years of following the stock market, it’s that investor sentiment shifts in waves and the enthusiasm for news in the marketplace is often selective. What I mean by this is that groups of institutional investors have a tendency to focus on the same news, and they sometimes attribute more weight to select pieces of news, regardless of the underlying fundamentals. Sometimes the market just wants to focus on all the bad news. Other times, the bad news gets ignored.
Currently, I’m seeing investors rally around the bad news in the marketplace. It’s a shift in sentiment that was expected because both equities and commodities were due for a correction. Investors are looking for news to support a decline in commodity prices and the trading action is becoming a self-fulfilling prophecy. Regardless, a retreat in commodity prices is most definitely a healthy thing for the long run trend. The commodity price cycle still has a lot more time to play out. It’s a view that I still wouldn’t bet against.
Stocks are likely to trade in a lackluster manner for the next two months, until second-quarter earnings season begins. Most large-cap companies reported good earnings in the first quarter, but there have been some disappointments—and this was most pronounced in financials and technology. While “Old World” industries like chemicals and railroads are doing well, “New World” industries like technology are struggling somewhat. This means that both consumers and corporate customers are keeping a lid on their information technology spending and this is restraining economic growth. A healthy technology sector is a must in today’s economy.
I repeat my previous view that there isn’t a lot of new action for investors to take in the current environment. We’re in a period of consolidation (or correction), which is what this market’s needed for quite a while. For most large corporations, the pricing power they hold remains intact and this means that second-quarter and 2011 total earnings expectations should be met.
Because the broader market isn’t expensively priced, the longer-term trend in my view remains positive. The most attractive sector