The raw commodity sector has taken a beating the past two months, with many individual commodity-futures markets presently trading at multi-month lows. The Continuous Commodity Index (CCI) last week hit a fresh 21-month low, and the index has been trending lower since scoring a new all-time high in April 2011.
There are not yet any concerted technical clues to suggest the raw commodity sector has bottomed out and will begin to trend higher. That would occur if individual commodity futures markets could post weekly high closes on a Friday, or produce two very strong up days in a row for prices. However, the Relative Strength Index (an overbought/oversold indicator) overlaid on the weekly chart for the CCI is at its lowest level since early 2008, when the CCI embarked on a three-year rally to a new high. The CCI is a basket of 17 major raw commodity-market prices combined into one index price.
There are some fundamental and psychological clues just starting to emerge to suggest the bear market in raw commodities has just about run its course. While weakening major world economies have been a major bearish underlying factor for all raw commodity markets, in just the past couple of weeks it has become apparent that the central banks of the U.S., European Union and China will likely move to provide more monetary stimulus to their economies. Indeed, on Thursday, China made a surprise move to lower its key interest rate by 0.25% to try to jumpstart better economic growth.
Fresh monetary policy accommodation is arguably bullish for raw commodity markets because it not only greases the skids for better economic growth (which means more demand for raw commodities) but it also likely puts downside pressure on the U.S. dollar. Most major world commodities are priced in greenbacks on the world market. A lower-valued dollar in the foreign exchange market means it's cheaper to buy commodities with other world currencies.
From a psychological perspective, keener media and trader attention on the beleaguered commodity sector, along with the oversold Relative Strength Index mentioned above, hint that the raw commodity sector is close to hitting a major bottom.
It is prudent for commercial end-users of raw commodities (including grains and liquid energies) to begin considering pricing their needs for as far out into the future as financially possible. Sound risk-management regarding the volatile commodity markets means trying to hedge prices that are in the top or bottom third of their recent historical trading ranges -- the top third if you are a commercial producer and the bottom third if you are a commercial consumer.
Veteran risk managers in commodity markets know the futility of trying to pick precise market tops or bottoms in the commodity markets. This veteran market watcher reckons that the bear market in raw commodities is now very mature and that most of the downside price action in most markets has already occurred.