28, 2008 -- Enormous sums of money are being made and lost daily in the stock and commodity markets due to volatility. But understand, volatility is a two edged sword, neither good or bad. According to wikipedia.com, "volatility is often viewed as a negative in that it represents uncertainty and risk. However, volatility can be good in that if one shorts on the peaks, and buys on the lows one can make money, with greater money coming with greater volatility. The possibility for money to be made via volatile markets is how short term market players like day traders hope to make money, and is in contrast to the long term investment view of buy and hold."
Bloomberg.com published two articles regarding the state of the stock and commodity markets and the volatility engulfing both. On March 20, in an article entitled, "US Stock Volatility Climbs to Highest in 70 Years," S&P says. They wrote, "the benchmark for American equities has advanced or declined one percent or more on 28 days this year. That's 52 percent of the trading sessions so far, which is the highest proportion since 1938. In 1938, the most volatile year since the index's inception in 1928, the S&P 500 rose or fell at least one percent during 57 percent of the trading days." S&P's senior analyst said, "the enormous uncertainty of the market is translating into volatility. Everyone is reacting to the day to day events as opposed to the longer term trends."
On March 21, Bloomberg.com had an article titled, "Commodities Drop, Rally in Dollar Stocks Vindicate Bernanke," the biggest commodity collapse in at least five decades. Investors who had poured money into gold, oil and corn, seeking a hedge against inflation and a weak dollar, sold commodities to raise cash or buy stocks. The Reuters/Jefferies CRB Index of 19 commodities tumbled 8.3 percent this week, the most since at least 1956." Thus, the US equity markets are enduring daily prices swings, the largest seen 70 years while the commodity markets recently endured a set back in values, the largest experienced in 52 years. At no time in recent history have paper and hard assets been subjected to such violent price swings. By the same token, at no time in recent history have investors, traders and agricultural producers been faced with so many money making or loosing opportunities on a daily basis. Which, in my view, proves we do indeed live in exciting times!
Understandably, some feel the boom with commodities has run its course. It is over. It is done. A fork can be stuck in it. The chief equity strategist for Citigroup Inc., said a, "commodity bubble is poised to burst, increasing the risk of investing in mining and agricultural companies." "A number of catalysts may be coming together, he said, to end the current commodity craze."
Others believe the outlook for hard assets remains sound. Here is what the Commodity Super Cycle Report has to say, "What is a Commodity Super Cycle? A super cycle is a continued trend in rising commodity prices that often lasts for several years if not decades. The reasons a super cycle begins are many, including under-development of commodity resources, industrialization trends in developing nations, population growth and even monetary policies of central banks. We believe the reason for the current commodity super cycle is the industrialization of the Asian nations, notably China."
My views have not changed. Commodities will rule and stocks drool as long as China and India embrace the free market system and more of their population move into the middle class. Equally important is this new development; commodities are, for the first time, gaining favor with traditional investment groups that have historically confined their interests exclusively to paper assets. Yes, indeed, times are exciting!
(The information in this article is the opinion of Commodity Insight's Jerry Welch and subject to change without notice.)