August 6, 2015

Could a buying opportunity be coming ahead for Gold and oil

I've spent a lot of time over the years discussing how the consensus is often too self-confident and wrong.

Well, the current consensus is to stick with high-growth market sectors and to avoid cyclicals. (Jim "El Capitan" Cramer captures this excellently in his opener this morning.)

But I wanted to discuss a possible contrary opportunity that might not be at hand just yet -- but could be soon. I'm talking about the bear market in commodities, which has gained steam to the downside over the past week.

Oil is possibly about to test its early 2015 low of $43/barrel, while gold is closing in on its 2008-09 breakout support of $1,000 and gold-mining stocks are back to 2002 lows. As such, we should probably be on the alert for a selling climax -- and a buying opportunity -- in the market's much-hated areas of industrial commodities and precious metals.

The three most important factors that have pummeled commodities are a strengthening U.S. dollar, the interest-rate picture and the prospect of slowing Chinese industrial demand.

The general consensus is that the U.S. dollar will continue to firm as rising interest rates buoy our currency, while China's economic weakness will continue to weigh on commodities and commodity-dependent currencies.

But an offset to that could be a final throw-up as sentiment moves to the far end of the spectrum and towards extreme bearishness. Already, the Market Vane poll of commodities traders is showing that gold bulls have dropped to 28% -- their lowest level in 14-plus years. It's a similar story with other commodities.

A potential short-term plus for commodities might be that the U.S. dollar could be vulnerable if I'm correct and interest rates move lower instead of higher.

While the 10-year U.S. Treasury yield rose recently to 2.5% from its 1.65% January low, momentum is faltering and the yield is back down to 2.22%. If rates drop further, a new headwind to the U.S. dollar could emerge and commodities could reverse back higher.

Let's watch this for an opportunity to trade the weakest part of the U.S. stock market in the weeks and months ahead.