InvestaDaily

The average trader and investor often look toward the stock, bond, and forex markets when diversifying their portfolios. Although these markets often serve the needs of these market participants, there is another market that institutions often turn toward if they want to either make speculative bets or further diversify their portfolios. 

The commodities market is where raw materials and primary products are exchanged. Commodity markets can include physical trading of the commodity itself or contracts to the rights of the commodity itself. It also has a lot of inherent volatility. This, along with having a more extensive history to study, lets commodities serve as great investment vehicles for institutions.

Let’s take a deeper look at the ins and outs of commodities.

Types of Commodities 

There are three types of commodities. First are the metals. These are further divided into two categories. The non-precious metals category consists of easier-to-find metals. This would include iron, steel, copper, and other metals that aren’t hard to get. The other metal sub-category is the precious metals category. This would include popular metals such as gold, silver, platinum, palladium, and other harder-to-find metals. The second type is agricultural produce. This would consist of coffee, cocoa, wheat, corn, meat, livestock, and others. The last type is energy, which consists of oil, natural gas, and other resources used for energy generation. Among the different commodities, oil serves as the most liquid commodity due to its widespread use in everyone’s day-to-day life. This is followed by natural gas and the precious metals gold and silver – popular inflation hedges. 

Importance of Commodities

Aside from trading and investing purposes, the commodities market is widely used by producers and consumers to handle their operations. Aside from being able to obtain larger quantities of the raw materials needed, the commodities market also allows them to hedge their inventories or produce. For example, if a large producer of wheat were to forecast that the prices of their inventory will fall in the foreseeable future, they can opt to hedge their inventory. This would be done by shorting wheat contracts. This would theoretically let them enjoy a price lock in their product. If wheat prices were to fall, they would sell the inventory for lower but it would be offset by the profits from the shorted wheat contracts. In fact, McDonald’s chicken nuggets only came into existence because they were able to hedge against potential volatility in poultry with the help of Ray Dalio. 

Economic Analysis

Commodity prices also play a role in economic forecasting. It can serve as valuable data for inflation research and can be used as a measure of economic change. For example, if an analyst forecasts that the price of metal will surge due to a lack of supply, then they would have valuable information on a specific factor that can affect the economy. Oil also plays a huge role in analyzing inflation. Most of the time, big rallies in oil lead to rising inflation for majority of countries.

Commodities Market and Globalization

The further development of the commodities market has also played a big role in globalization. As the interconnectedness of countries is growing, faster and more liquid transactions are needed. The commodities market has made it easier to obtain raw materials for cheap from countries that specialize in its production.

For example, Taiwan is a good exporter of semiconductor all over the world. While China specializes in exporting raw materials such as steel, iron, and etc. Thus, every country play a vital role in terms of commodity as they are trading goods for its common good. It allows individuals and entities to forecast as well regarding the prices of each commodity whether in agricultural produce, energy, or metals.

Spot market, Options market, Futures, and Derivatives

In the commodity market, the spot market simply means buy and sell at a certain price with an immediate delivery, as is. In terms of option market, the option market gives the holder the right but limited for buying and selling (trading). On the other hand, future market is an auction market in which participants buy and sell commodity and futures contracts for delivery on a specified future date. Lastly, the derivatives market is the underlying asset that are based from the futures market or options market.

How commodities can be a part of your own portfolio

Even though mostly institutions take part in this market, everyone has the capability to also trade and invest in commodities. All you would need to do is find a platform and create your account. Once you create and fund your account, you’re free to do all kinds of trades across various markets. Of course, we recommend that you have a strategy first before investing serious amounts into commodities. If you want to learn more about trading, head on over to Investa University!

---

EASILY FIND THE FASTEST MOVERS IN THE MARKET

Our Market Signals will give you real time prompts on breakouts, breakdowns, and volume spikes that happen across markets in multiple timeframes.

Check it here: www.investagrams.com

@pediong has been sharing his thoughts consistently in the Investa community ever since September 2020 and has been very active recently. 

A couple of weeks ago, our featured trader posted his technical analysis on $ALI, a hot stock in the local market and real estate company led by the AYALA GROUP. $ALI was charted by @pediong predicting that $ALI was bound for a retest at the 27-ish area and bound for a breakout if it continues.

As the stock recently bottomed at around 22.35 (52-wk low), @pediong charted its support, volume,  resistance, trendline, and RSI on the chart. @pediong felt an opportunity to have a good entry near the 52-wk low at the 22-24 area.

TECHNICALS OF THE TRADE

Technically, $ALI bottomed at 22 are which was also its 52-wk low. Thus, the stock recently broke the resistance 27ish area. After breaking the resistance, volume was still strong. ALI will now have to face resistances at the 30 and 32 levels as it tries to continue its uptrend. ALI is showing strength in terms of RSI as it continues to reach the oversold area.

@pediong was confident that this stock would further go up as it already bottomed at 22.35 (52-wk low). He also charted that ALI will go up as he indicated in his TA the supports, resistances, trendline, Volume, MA and the RSI. He charted a good entry near the support and possible resistance. Furthermore, he is planning his trades carefully as real estate industry isn’t in the best of positions right now.

FUNDAMENTALS

Ayala Land Incorporated is a real estate developer that focuses on real estate development of middle-high class properties. ALI is led by the AYALA GROUP, a prominent family in the country and a diversified holdings firm focused on real estate, telecom service, banking, malls, and others. As such, the stock is heavily affected by how the real estate market moves. Although interest rates remain high, the main driver for the stock right now seems to be the overall bullishness of the market as a whole.

WHAT SHOULD BE MY NEXT MOVE

As the stock recently broke its resistance it is bound for a retest in the next few weeks. It would be wiser to observe and wait for what $ALI and other property stocks might do next before jumping in. This stock is good for growth since the real estate industry in the Philippines is poised to grow in the following years. The demand from consumers globally is also continually growing. However, it’s best to wait for a consolidation, pullback, or a good entry near its support for a better risk-to-reward ratio.

Once again, KUDOS to @pediong for being this week’s featured trader! Enjoy your 14-day InvestaPrime Access and continue to be an inspiration to the trading community.

---

EASILY FIND THE FASTEST MOVERS IN THE MARKET

Our Market Signals will give you real time prompts on breakouts, breakdowns, and volume spikes that happen across markets in multiple timeframes.

Check it here: www.investagrams.com

The battle between the Fed and inflation has been making headlines almost every other week. Along with the ongoing fight against inflation, an ominous question has been coming up from time to time: is a US recession coming? 

Various events have been indicating that the economy is getting worse. With inflation reaching historical highs, the stock market has seen the brunt end of things as investors are shying away from risky assets. Major US stock indices have already fallen by more than 20% and have yet to retake significant levels to indicate a bottom. Earnings reports have also shown declines and negative surprises.

To those unaware, a US recession will affect most of the financial markets around the world. Economic developments in the US will affect even the portfolios of traders and investors from other countries. Let’s deep dive into recessions and how they affect markets everywhere. 

What is a recession?

In economics, a recession happens when an economy starts to experience a decline in overall production. Typically, a country is in a recession when the national GDP declines for two consecutive quarters. During recessions, you will commonly see businesses struggle and unemployment rates rising. Usually, a recession may last up to several months or years based on the situation and how the government handles economic issues. The cause usually differs from case to case as many factors affect how economies move. Most of the time, central banks are at the center of the efforts to mitigate and prevent recessions as they can control interest rate policies dictating how fast or slow an economy grows.

History of US recessions

To better understand recessions and their impact on the stock market, let’s look back into history and see how past recessions unfolded. Let’s start with the 1970s – a decade of instability brought by a mismanaged economy. 

1973 US recession

In 1973, the US went into a 16-month-long recession brought about by inflation reaching double digits. The president during that time wanted cheap money to flow into the economy in the hopes of solving the unemployment problem. The Fed keep rates low during the build-up to the recession in the hopes that solving unemployment would eventually lead to lower inflation. However, this was not the case as the country’s GDP had negative growth for a long time and unemployment rose to almost 9%. The stock market fell by more than 50% and would not be able to recover for a long time. Even though the recession stopped sometime in 1975, the economy was still in shambles as inflation and unemployment continued to ravage the country.

Paul Volcker induced recessions in the 1980s

The next recession came in 1980, with another quickly following in 1981 until 1982 as Paul Volcker came in as the new Fed chairman. As they had a new mandate that focused on cracking down on inflation, interest rates rose to as high as 20%. GDP declined while unemployment reached double digits. Although recessions are usually bad for the market, this specific recession didn’t do much to hurt stocks as the fallout was shallow and would lead to a strong bull run.

1990 US recession

In 1990, the US economy faced another recession that lasted until 1991. This time it was caused by a savings and loans crisis wherein numerous institutions failed to handle the finances of many citizens. Coupled with Iraq invading Kuwait, commodity prices rose again globally leading to instability in correlated markets. Unemployment peaked at 6.8% while the stock market fell by roughly 20%.

Dot-com bubble

In the early 2000s, the US would face another recession. This time the US recession was brought by an overheating stock market as the dot com bubble burst. Many companies and startups failed, causing a lot of wealth to vanish from the whole economy. The recession took eight months. Companies during that time were overvalued and failed, causing the stock market to fall by 50%. 

2008 Financial crisis

Just years afterward, the US economy would face yet another recession brought by troubles from the financial system. The housing market crisis lasted from December 2007 to June 2009, triggered by various shady loan defaulting and the widespread use of derivatives. The stock market would then fall by 50% again, while unemployment reached 10% throughout the recession.

Covid-19 pandemic recession

A couple of years ago, the US technically faced another recession as the pandemic caused the economy to decline by 5.1% and 31.2% simultaneously. With Covid hampering businesses everywhere, unemployment rose to a whopping 14.7%, but the market only crashed for two months before reaching all-time highs. This recession was the shortest recorded as it would only last one quarter. 

How US recessions affect global markets

Let’s make one thing clear: the biggest mover of assets is LIQUIDITY. No matter what happens, assets will only increase in price if there is demand and money follows. A great story or situation will only translate to higher prices if people buy into it. It’s undeniable that the US stock market is the largest in the world. The majority of funds, and therefore liquidity, are centered around the US financial markets. Should any pain be felt there, the negative sentiment will spill over to other risky assets. With the advent of electronic trading and faster transactions, the correlation between different markets has grown stronger

A prime example of this was the 2008 US recession brought about by the housing market bubble. Liquidity was sapped away from stock markets everywhere. European markets like the FTSE weren’t safe as stocks fell by almost 50%.

The Philippine stock market was in a prime position for growth. Many companies and even big names were poised for major rallies. However, the US recession caused investors everywhere to shy away from stocks, stunting the local market’s growth and causing share prices to fall sharply.

Going back to the present

Inflation is once again reaching historical highs after going all the way up to 9.1%. Even as the Fed aggressively hikes rates, inflation continues to climb. Wages have grown, but purchasing power is still being eaten up by absurdly high inflation. Stocks have fallen by as much as 20% from their recent highs. The only bright spot now is that oil in the global markets has started to cool down and drop from its highs, while stocks have also started to rally a little bit – but have yet to retake major levels.

The best comparison we could make right now is relating the great inflation of the 1970s to today’s situation. As with the situation back then, it could be safe to assume that a sense of control needs to be established in the US economy before we can see the markets start to shine bright again. Keep looking out for whatever developments happen moving forward as we could be at a major turning point for the markets.

---