The raw commodity sector, as depicted by the Continuous Commodity Index, has seen prices trend generally lower for 10 months. This comes after the CCI posted an all-time high in April 2011. The CCI is a basket of 17 major commodity futures markets rolled into one composite price index. It's an excellent gauge of the overall health of price trends that are occurring in the raw commodity sector.
A more risk-averse investor mentality in the market in the past several months has squelched speculative interest in the commodity markets. Veteran commodity market watchers know that speculators need to be solid contributors on the long side for any major bull market run in a commodity market to get fully uncorked. History also shows this to be fact.
A barometer of investor risk appetite is the U.S. Treasury market -- namely U.S. T-bonds and T-notes futures. U.S. government debt is still considered one of the most safe-haven investment assets in the world, if not the safest. During times of keen investor uncertainty in the market, investors will snap up U.S. government securities, even though their returns are lower than those of riskier investment assets.
An examination of the daily chart for the nearby March U.S. Treasury bond futures contract shows that prices have been trading in a sideways and choppy fashion at higher levels (lower yields) since late September 2011. The U.S. debt market's price strength is mainly attributed to shaky world economic recoveries and the ongoing European Union sovereign debt crisis. These two factors have also been bearish weights on world commodity markets because of their potential to reduce demand for commodities.
If and when the European Union's debt crisis stabilizes to the point where the market moves beyond the matter, then U.S. T-bond and T-note prices will start to falter. This would also likely coincide with better worldwide economic growth.
Traders and investors who are awaiting the next big boom in commodity market prices, which will most certainly occur at some point down the road, need to keep a very close eye on the U.S. T-bond and T-note futures prices. When these two markets start to show serious price weakness, that will be an early green light to suggest that the next boom in commodity market prices is under way and that it's time for the speculators to climb on board the bullish commodity locomotive.
