Keep an eye on the Dow Jones-UBS Commodity Index
Unfortunately, commodity indices are more useful as a tracking and speculative tool, than a trading vehicle. Commodity indices in both the futures and equity markets tend to be illiquid and inefficient. Nevertheless, they might give us some clues into the direction of the asset class enabling for more comfortable positioning in individual sectors of the commodity market.
A popular gauge of commodity values is the Dow Jones-UBS Commodity Index because it provides a diversified representation of the commodity futures markets. In fact, the Dow Jones-UBS includes 20 commodity futures contracts with a weighting assigned to its economic significance and market liquidity. Specifically, according to MRCI Online, the index is comprised the following break-down:
• Energy (natural gas, crude oil, Brent crude, heating oil, and gasoline) – 36.69%
• Agriculture (soybeans, sugar, corn, wheat, cotton, coffee, and Kansas wheat) – 28.21%
• Industrial Metals (copper, aluminum, zinc, and nickel) – 16.74%
• Precious Metals (gold and silver) – 12.62%
• Livestock (live cattle, lean hogs) – 5.74%
The weightings are rebalanced annually to compensate for market movement and price changes, so it is possible for the actual weightings to stray from the target levels.
The trend has obviously been down trodden in commodities as a whole, but the chart of the Dow Jones-UBS Commodity Index shows some promising signs of bottoming action. The index has found support near the psychological level of 100, which also happens to be the area in which we saw a significant low in 2009. Further, we haven’t seen a reading beneath 100 for any length of time since 2002. Given inflation, albeit modest price pressure, and the massive amount of Quantitative Easing that has taken place since, it seems sub-100 levels simply aren’t sustainable in the long-run.