The nascent recovery in the equity markets is sending waves of excitement among investors and traders. The rumor going around is that now is a good time to buy. Investors who have eagerly been awaiting another chance of trying their stake at a long steep bull rally are enthusiastic, hoping for another bull run except this time they'll be more cautious. Ironically, even as I write this all the major market indexes have plunged. This could be due to many reasons such as the realization that it is a jobless recovery, or perhaps the possibility of a collapsing US dollar after the Group of 7 meeting.
Perhaps the equity markets are not the best ones to be looking toward to make profitable trades. Of late, there has been an increase in the contracts traded in the commodity markets, which are showing signs of a rally. Whether this rally is a speculative mania or a long sustaining one remains to be seen, but the fundamentals are clearly driving commodity prices higher. For example, the increased need for raw materials, especially by Asian economies and China in particular, have contributed to the rise in commodity prices. Wheat prices have jumped due in large part to the heat wave in Europe, and a drop in cotton production in China sent cotton prices higher. Clearly, these rising trends are being noticed. Pension funds and insurers are including commodities on their lists of investments, and there is a noticeable increase in the number of hedge fund investors.
Obviously, there is a lot of bullish sentiment in the commodities market. How can you take advantage of it? Although there are several ways of measuring sentiment, few focus on the commodity markets. One of them is the Bullish Consensus, which measures the bullishness and bearishness of the market. It can be used to determine if you're on the right side of the trend and also be used as a contrarian indicator. In this issue, Technical Writer David Penn details how this indicator can be applied to your trading. Another method of measuring market sentiment is the tick indicator, and you can find out more about this indicator in "Does The Market Have A Personality?" by James Kellndorfer, starting on page 18. Kellndorfer applies the tick indicator as a measure of market sentiment using the Standard & Poor's 500 futures contract as an example. The second part of this article will appear in our December issue, so stay tuned.
Remember, if you are going to jump into the commodities markets because of their rising trends, don't let greed overcome your emotions. You still have to develop solid trading systems and follow them carefully. Trading futures involves leverage and contract expiration, making them riskier and short-term trading instruments. In the STOCKS & COMMODITIES interview starting on page 68, Charles LeBeau discusses some interesting points regarding the creation of systems. As someone who started out trading futures and moved on to trading equities, he knows when to rely on systems and when not to. Read about his trading experiences. I think we can all learn a thing or two.
Originally published in the November 2003 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2003, Technical Analysis, Inc.
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