Commodities’ “Head-Smashed-In”

To start, I am totally hijacking Barclays’ cleverness.

A team of analysts led by Kevin Norrish has done the hard work. They’re rallying investors to essentially round up commodities and then push them off a cliff.

The title of Barclays’ recent note to investors is good: "Buffalo Jump."

In the note, they suggest commodities have just performed a Buffalo Jump, a term used to describe an old hunting tactic where Native Americans would herd bison off a cliff to their death. If the bison survived the jump, fellow tribesmen would finish the kill with spears and bows. (At least, that’s what my sources in the Wikipedia Tribe tell me.)

Those sources also tell me the Blackfoot Indians called these jumps "pishkun," which translates as "deep blood kettle."

Are commodities destined for the deep blood kettle?

Barclays’ team of analysts seems to think so.

Commodities are "vulnerable to a wave of investor liquidation," they say.

The team goes on:

"Given that recent price appreciation does not seem to be very well founded in improving fundamentals, and that upward trends may prove difficult to sustain, the risk is growing that any setback will result in a rush for the exits that could again lead commodity prices to overshoot to the downside."

A rush for the exits, ay?

I get what Barclays is putting together here: legitimate rationales that suggest the path for commodities is down.

But they might be expecting too much.

I would remind Mr. Norrish and his team, though, that the beginnings of bull markets are never "very well founded in improving fundamentals."

Any new trend is met with, and ironically fueled by, skepticism. And sometimes nascent price appreciation actually feeds back into helping underlying fundamentals improve.

So let’s take it one step at a time here.

Before we rush to conclude that key commodities like crude oil and copper will fall to new lows, let’s start by identifying what a mere corrective downturn would look like and go from there.

"Will investors keep pushing commodities off a cliff?"

The Futures Pressure for Oil and Copper

Back to the Barclays team:

"Key commodities markets such as oil and copper already face overhangs of excess production capacity and inventories, but also now face another obstacle in the recovery process, that of positioning, which is now approaching bullish extremes."

They are preaching to the choir.

Crude oil and copper each show relative positioning extremes in the futures market. That’s a glimpse into investor sentiment I love to use to help optimize my trading decisions.

Large speculators tend to be wrong about the future direction of price once their collective positioning has reached an extreme.

The last time crude oil traders were as bullish as they are now, crude plummeted from about $70 to $45 per barrel.

It’s a similar picture for copper.

In the past year, when bearish positioning was erased, as it has been now, copper proceeded to fall significantly.

I think the price targets for crude oil and copper are $35 per barrel and $2.08 per pound, respectively. [Recent prices: $38.08 and $2.18.]

Maybe it goes without saying, but how the two commodities behave around those levels will determine whether or not this coming downturn is corrective or impulsive — whether they eventually push to new highs or resume their bear markets.

There are exchange-traded products to play for a downturn in crude oil. A good one for a short-term trade is the DB Crude Oil Double Short ETN (DTO). It’s a 2x-leverage inverse ETF designed to go up twice as fast as crude oil goes down.

As for copper, there is the iPath Bloomberg Copper SubTR ETN (JJC).

Don’t Get ‘Smashed’

Archaeologists have studied and preserved dozens of Buffalo Jump sites in North America.

The Wikipedia Tribe tells me the Blackfoot Indians named one site in the Canada "Estipah-skikikini-kots," which translates as "Head-smashed-in."

"According to legend, a young Blackfoot wanted to watch the buffalo plunge off the cliff from below, but was buried underneath the falling buffalo. He was later found dead under the pile of carcasses, where he had his head smashed in."

Mr. Norrish and his team might want to be careful with their commodities prediction, lest they suffer the fate of the young Blackfoot if commodities bounce back after a correction.

As for me, I think I’ll be watching commodities fall in Montana at the "Too-Close-For-Comfort" Buffalo Jump site.

Do right,

JR Crooks

Your thoughts on “Commodities’ “Head-Smashed-In””

  1. Speaking of tribal stuff makes me consider what the agency-man said to the chief; “I’m from the government and I’m here to help (‘myself’ is left unspoken).” Thank goodness some forward thinking tribes landed on casino wealth as their path to prosperity and not waiting under the cliff for abundance to rain down on them. Those clever tribes are doing well today.
    Not knowing much about commodities priced worldwide in US Dollars, it seems to me that when a Dollar is priced at 70 and climbs to a high range of 94-98, where we’ve been recently, prices necessarily will fall. That’s how I understand it. Many call it deflation in pure price terms, but I see it with simplicity. The more the dollar strengthens the more of the underlying commodity it will purchase. Printing more of the world’s default currency and we’ve done a bunch of that, makes it absolute that with the coming crisis in other currencies, the dollar wampum will emerge as the winner, in a tribal analogy.

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“JR” specializes in trading commodities, currencies and options. He has spent nearly 10 years analyzing financial markets and writing about global economics. JR honed his trading techniques and global-macro worldview alongside his father, Jack Crooks, at Black Swan Capital. JR also…