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Investing in Commodities During a Market Upswing

The sideways asset action from the last week of February kept the pressure on sellers that may have overstayed their welcome once again trying to pick that elusive market top. They may not find it. Thats because the markets setting up for a "Square Root Recovery" heres everything you need to know to understand whats going on

What the "Square Root Recovery" Means for Commodities

The dip in prices in late February was once again met with buying that now have positioned oil, gold and stocks for a run to recent highs. This setup is impressive now that the S&P has reclaimed the 1100 level and now attacking resistance at 1110/1120 which was the triple top from November/December. This has all been accomplished without the aid of Dollar weakness that can accelerate the bull trend on a turn down below 79.5.

Stocks were nearly unchanged for the last week of February with prices in the major indexes off less than 1 percent. The above-mentioned S&P was down 5 points, which is a 0.4% loss in the broad based market barometer. The Dow was down 77 points, -0.7%, and the NASDAQ lost 6 points, -0.3%, for the week ending February 26th.

The "square root" recovery was not my original description but aptly summarizes market action over since the latter half of 2008. As the name implies the recovery is that of a square root sign, which is a sharp initial recovery followed by leveling off later down the road. The V shaped recovery has stalled with prices moving sideways in most assets since the highs of December 2009 and January 2010.

Stocks had led the way for the past year and look ready for another attack on the S&P 1150 then the original breakout of 1300 from August 2008. Since my research service, Resource Trader Alert, focuses on trading commodity futures, not stocks not stocks the question remains: how does that affect our futures plays?

How to Find the Positive

The upside potential is magnified in natural resource assets, which were crushed in the previous economic decline. Prices in commodities have another 15% to regain half of the overall drop from 2008. Stocks have long ago rallied above that level and signal a continued recovery with resiliency short lived selling pressures.

A Commodity stock rally from the February 5, 2010 lows is leading the way: US Steel $42 to $54 (28%), Cleveland Cliffs $39 to $58 (49%), and the worlds largest Gold producer Barrick Gold $33 to $38 (15%). (Percentage gains as of early March.)

One natural resource that is not exchange traded, Iron Ore, has made new yearly highs. This from Bloomberg:

"The cash price of iron ore delivered to China, the worlds biggest buyer, rose to the highest in more than a year on demand from the nations steelmakers.

"The cost of 62 percent iron-content ore delivered to the port of Tianjin increased 1.4 percent to $133.10 a metric ton today, the highest in at least 14 months, according to The Steel Index. The so-called spot price has gained 9.8 percent in the past four weeks and has more than doubled from its 2009 low on March 27."

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