The markets are gaining momentum especially with the strong gains in commodity prices. We will look at some of these things in greater detail over the next week or two, but here are some of the reasons that WILL provide a good rally in commodity prices and therefore a good jump in all the related commodity stocks:
- stimulus packages, especially the Obama package, which is quite substantial in size at around $800 billion
- likely weakness of the US dollar, because of too much supply expectations
- an extremely sharp fall in just 6 months that erased 3-4 year of gains almost without a decent and protracted bounce back
- near zero returns from debt markets again driving investors to seek opportunities to increase their returns
- human urge to do something all the time to make money
So, with a weak dollar expectation and with virtually no returns and safety of capital from debt investments, coupled with low risk after a steep fall in commodity prices and the possbility of good returns investors WILL flock to commodities markets as the stimulus package raises positive expectations. The commodity bulls will not let go the potent combination of these factors to ensure a good pull back in prices of most commodities.
We had recommended the commodity theme on 29th November 2008 and had again reviewed it on 15h Dec 2008 saying that there is a lot of steam left in the commodity stocks. The substantial jump in commodity prices since the last week of December suggest that we will see a good rally in the commodity stocks over the next two months to get closer to their 200 day averages.
The rally will peak out as the rise in commodities at some stage starts raising questions about the revival of demand and talks of recession resume. It will still be a bear market rally, but the duration is now likely to be longer seeking a higher target than before. It will pay to TRADE in stocks that lost the most in October fall and have a long history and still have a long way to recovery. We still do not advise a buy and forget strategy at this point of time.
WISHING YOU ALL THE BEST FOR A HAPPY AND PROSPEROUS 2009. IT IS BOUND TO BE A LOT BETTER IF YOU PLAY IT SMARTER.
Vivek Bhargava
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