How Traders Can Profit From The Commodity Bull Run
Oil is hitting all time highs day after day, soybeans are surging, and corn’s uptrend is picture perfect. Is there a way an active stock trader can participate in these moves? Trading physical commodity futures directly is one choice. However, one would need to set up a separate commodity futures account, in most cases. In addition there are risks involved that go beyond simply losses in your account; one can actually end up owing the broker money and or get stuck limit up or limit down in a locked position- unable to exit.
A solution to the inherent problems in trading commodities directly is to use the IPATH Dow Jones AIG Commodity Index ETN ticker symbol DJP. DJP is traded on the NYSE via Arca and represents 19 diverse physical commodity futures unleveraged; plus the rate of interest that could be earned on cash collateral placed in specific Treasury Bills.
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DJP provides access to the physical futures markets, yet has broad diversification; thus greatly limiting risk of single commodity stocks. Each commodity group, inside the index, is rebalanced annually and exposure to any single group is capped. The weightings of the index are 35% energy, 28% agriculture, 21% industrial metals, 10% precious metals, and 7% livestock.
DJP has been in a nice uptrend on the weekly chart since early 2007. It experienced a relatively dramatic correction in March 2008 and now appears to have resumed the uptrend. However, commodity bears will point out, a double top may be forming on the weekly chart portending to a prolonged retracement. My opinion would be to wait until 68.03 is taken out prior to going long. On the bearish side, I would wait until 59.97 to short.
Dave Goodboy is Vice President of Marketing for a New York City based multi-strategy fund.