Money Flow Signals Investors Favoring Stocks Over Commodities

February 14, 2013 12:17 AM

What Traders are Talking About:

* Don't discount money flow. There are plenty of "reasons" for the recent price pressure in grain and soy complex futures, but perhaps the most telling has been money flow. Since the beginning of this year, investors have been actively pumping money into the stock market. At the same time, money flow into commodities has slowed. That money-flow pattern has been especially strong since the start of this month, with the Continuous Commodity Index and the major U.S. stock indices headed in opposite directions. This suggests investors are currently not seeking the ultra-high risk of commodities, instead favoring slightly less risky equities.

The long and short of it: With the "January barometer" -- a theory that stock market performance in January predicts its outcome for the rest of the year -- signaling a strong year lies ahead for the stock market and many commodity markets (including ag markets) searching for levels that attract demand, investors have "reasons" to continue favoring stocks over commodities.

* Another way of saying lower prices. Many ag commodities are currently are in a price-discovery process or searching for "value." Basically, that's just another way of saying they are in a price decline. But the price-discovery process is one that's necessary coming off of historic price rallies. Markets must rediscover the price level that's "low enough" to attract improved demand -- both in the physical market and on the board -- after historically high prices slowed use to ration supplies. That process can be quick, or it can take weeks/months depending on market conditions and the underlying fundamentals.

The long and short of it: Grain and livestock markets are at risk of additional price pressure until the price-discovery process is compete -- the level where demand signals prices have dropped "far enough."

* Euro-zone slips deeper into recession. Fourth quarter GDP data signals the euro-zone economy contracted more than anticipated at -0.6% versus forecasts for -0.4% and -0.1% in the third quarter. The drop was the steepest since the first quarter of 2009 and 2012 marked the first time no quarter produced positive economic growth, dating back to 1995. The two economic heavyweights Germany and France each shrank markedly during the final quarter of last year.

The long and short of it: The disappointing euro-zone data is weighing heavily on the euro and sharply supporting the U.S. dollar, which is yet another hurdle for commodities.



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