Wednesday, February 20, 2008

Speculation in Commodities vs. Technology

During the course of the five year bull market that appears to have ended last October, the technology and commodities sectors have been two areas where a considerable amount of speculative money has flowed in search of extraordinary returns.

Since October, money has flowed out of technology, as indicated by the action in IGM, a popular technology ETF. Conversely, speculative money has been flowing in large quantities into commodities, as the action in gold, agriculture, oil, natural gas and other commodities can attest to. While there are a number of commodities indices and ETFs out there, many of them (notably the CRB Index, but also the GSCI) have such a heavy weighting in oil and gas as to make them de facto energy indices and not a good proxy for a broader representation of industrial metals, precious metals, agricultural commodities and the like. For this reason, I have chosen to highlight the iPath Dow Jones AIG Commmodity Index (DJP) as my broad-based commodities benchmark (the Rogers International Commodity Index, ticker RJI, is also broadly diversified, but is only it its fifth month of operation.)

Looking at a ratio of the IGM and DJP ETFs or stacking them on top of each other, as I have done below, you can see the flow of speculative money out of technology and in to commodities. For those seeking a strong upward trend in the current downturn, commodities represent an excellent opportunity. Conversely, when speculative money starts flowing out of commodities and back in to technology, expect to see the NASDAQ and other broad indices stage a more sustained move to the upside.

2 comments:

Anonymous said...

You are right about commodities. However the Rogers commodity indexes have been around for investors longer than the one you mentioned. The RJI was listed only 5 months ago, but there have been and are other ways to invest in the Rogers indexes. If you give me an email, I will send more information including a study which shows the Rogers Index far outperforms the one you mentioned. The Rogers is much better constructed which is why it outperforms so much.

Bill Luby said...

Hi anon,

Thanks for your input. If you are still reading here, I'd be interested in taking a look at the study you mention.

Feel free to send it to bill.luby@gmail.com

Cheers,

-Bill

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