Wednesday, March 19, 2008

The Downside of Commodities Trading

There was some heavy selling in the market today, which centered around anything commodity related. I could have picked a lot of charts to post above, and they all would have looked similar. This chart is of the DB Agriculture commodity ETF (DBA).

Energy, materials, and commodity stocks have been on a tear in recent months. As the rest of the market sold off, anything related to oil, gold, etc. continued to go higher. And tons of investors who have never traded commodities before piled into these investments, simply because they were going up.

That's all fine, as long as your realize the risks involved. Commodities can be very volatile, and we saw some of that on the downside today. Oil plunged over -4%, even as it is still above $100. And gold plummeted roughly $40 on surging volume.

As the ETF above shows, many of the related stocks were sold off on heavy volume, as traders moved quickly to lock in profits. Since these areas had been leading the market, when you lose that leadership, it usually drags down the whole market initially.

But as those proceeds eventually get reinvested, they should begin to flow into other sectors that have not runup so much. From my perch, I think tech looks attractive, as it had been the hardest hit sector so far this year.

I would have liked to see a more benign pullback today, but it is what it is. The observations I made earlier this week are still valid, as long as we hold above Monday's lows. But investors are still very skittish, as can be seen in the investor sentiment indicators.


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