Commodity futures seek a bottom

Don’t let crude oil’s second-half 2017 rally (and its effect on most commodity indexes) fool you: More commodities are near long-term lows than highs.

Many commodities have been mostly declining for the better part of a decade or have gone nowhere for a couple of years. Wheat, coffee, sugar, cocoa, rice, cotton, orange juice, and natural gas are just some of the markets that are at—or relatively near—the lows they set after the 2008 market collapse. Gold and silver are nowhere near the peaks they hit in 2011. Corn futures’ (chart below) trading ranges separated by a sell-off over the past 14 months is emblematic of what many markets have been going through.

March 2018 corn futures (ZCH18), 12/26/16 – 12/19/17

Source: OptionsHouse

So what to do in the New Year?  Well, a common mistake some traders make is to treat “commodities” as an asset classand who can blame them, given all the commodity indexes out there. They’re not; they’re individual markets with their own fundamentals and catalysts, despite overlap and correlation between similar markets in the same sector (e.g., corn and wheat, crude oil and gasoline).

Despite the expectation of continued rising interest rates, analysts aren’t predicting a return to the broad-based inflationary commodity runs of the 1970s and early 1980s—or even a mini-bubble like 2008—in 2018. But with so many markets in extended ruts, it’s wise to watch individual commodities for successful tests of historical lows.


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