Tag: commodities

Trading commodities is not the same thing as trading commodity stocks. Commodity stocks, especially in partially-open economies like India, have their own cadence.

Take aluminum, for example. If you compare the MCX Aluminum Index with National Aluminum stock, the stock has vastly outperformed the metal.

While there is something to be said about the stock being more volatile than the metal, the difference is returns is night-and-day.

Stocks are evaluated on the basis of free-cashflow, earnings growth, return on capital, etc. While the prices of metals if mostly determined by short-term demand-supply imbalances.

Generally, Indian metal stocks have vastly outperformed the metals themselves.

If the government has erected tariff barriers to protect certain domestic industries, it makes no sense to try and link commodity prices to producer prices. Going back to our example, there is zero correlation between the monthly returns of aluminum vs. the monthly excess returns of National Aluminum (over the NIFTY 50 TR index) on any time frame.

Trading metals is completely different from trading metal stocks.

Code and charts on github.

Typically, trend-following systems span multiple asset classes in order to reduce correlations. There could be a case for applying a trend-following system over equities and commodities in India. However, not all commodities trade and activity profiles can be vastly different.

It appears that most of the trading activity at the MCX occurs between 6pm and 9pm.

Not all listed commodities trade…

… and most of the activity centers around silver and natural gas – two of the most volatile commodities.

It maybe worthwhile to add at least some of these tickers into the mix and measure their effect on trend-following portfolios.

Legend
PFERT: Primary Commodity Prices, Fertilizer
PCERE: Primary Commodity Prices, Cereal index
PRICENPQ: Primary Commodity Prices, Rice, Thailand
PWHEAMT: Primary Commodity Prices, Wheat
PFOOD: Primary Commodity Prices, Food index

If I am reading this chart right, when prices of food commodities (cereals, rice, wheat) go up, fertilizer prices go up. But when food prices come down, fertilizer’s stay up? Wheat prices are more-or-less where they were back in the 90’s. The rest have barely budged. No wonder I’ve spent most of my adult life hearing about farm distress.

Code and charts are on github.