A Major Rotation Coming Soon in Commodities
Momentum chasers have been chasing the price of wheat. Wheat is the best performing commodity of the year, up 35.93% as of this writing.
On the other hand, what has been neglected is coffee. No one is chasing it at the moment, but that’s where the value is to be found. It’s down 37.52% this year.
So how do you know when the tide will turn away from wheat, the year’s best performer, and into coffee, this year’s worst performer? You can look to the chart of the grains ETF (JJG) vs. the coffee ETF (JO). Let’s see what it looks like below.
Grains vs. Coffee
You can see that as 2012 began, the grains broke out relative to coffee. However, the momentum chasers are good at bidding up a commodity far too high, far too fast. You can see this by the steep angle on the chart (green line). These types of steep angled trends can’t last forever. So you’ll soon see this reverse course.
Once it does, you’ll know that there is a rotation happening within commodities from momentum to “value.”
You see, wheat can only go up so much further from here. Its upside vs. downside risk is now great. However, the opposite is now true for coffee.
Coffee’s downside risks versus upside reward are beginning to become compelling for the first time in quite a while.
So should you be chasing grains or investing in coffee? I’d say the latter is becoming attractive. Once this steep uptrend line breaks, momentum traders will be pulling out of wheat like their butts were on fire. That’s when money will roll into some of the most beaten down commodities like coffee.
The lesson to be learned … don’t chase what appears to be hot. Instead, invest in what appears to be not so hot – for it will be one of the next hot things as the next 12-18 months unfold.
Have a nice day!
Editor, Commodity Trend Alert