2 November 2008
Relative Strength Performance is the use of a ratio to compare the relative strength between any two entities. By dividing an individual stock, commodity or sector to its major index we can determine whether the stock, commodity or the sector is outperforming or underperforming the major index. A rising ratio indicates that the stock, commodity or the sector is outperforming the major index. Trend analysis or other technical tools can be applied to see the relative performance charts.
Relative performance is one of the most important tools in today’s investment business. When it is analyzed right the tool can be very valuable for fund managers who are managing funds with different strategies. By analyzing the underperforming and outperforming sectors in a market, the fund manager can buy the outperforming sectors and sell the underperforming ones. In this way the fund manager reduces the risk of being only on one side of the market. The Relative Performance tool can also be used to fine tune the weightings versus the benchmarks, as fund managers can choose to invest more heavily in outperforming stocks and on the other hand reduce their weighting in underperforming ones.
In this issue ADIC’s TECH TALK analyzes the long term performances of the major commodities by using absolute and relative performance charts. We will use the Reuters/Jefferies – CRB Index and its components.
The history of the Reuters/Jefferies – CRB Index dates back to 1957, when the Commodity Research Bureau constructed an index comprised of 28 commodities that made its inaugural appearance in the 1958 CRB Commodity Year Book. Since then, as commodity markets have evolved, the index has undergone periodic updates to remain a leading benchmark for the performance of commodities as an asset class. The index was renamed the Reuters/Jefferies – CRB Index in 2005 when it underwent its tenth and most recent revision – as the collaborative effort of Reuters, the global information company, and Jefferies Financial Products, LLC – to maintain its continued accurate representation of modern commodity markets. (www.jefferies.com History of the index)
Below are the constituents of Reuters/Jefferies – CRB Index and the weightings of these constituents in the index. We are using the RJ CRB index because it is more balanced with its constituents.
WTI CRUDE OIL
WTI Crude Oil has a 23% weighting in the RJ CRB Index. The weight of the energy group in the RJCRB Index is 39% including Natural Gas from Group II. Crude Oil broke above 35 levels in 2004. The breakout on the absolute price chart was followed by the breakout on the relative performance chart during the 2003-2004 period. The P&F chart of WTI Crude Oil / RJ CRB Index, broke out of a contracting range with clear P&F buy signal. After the breakout in 2003-2004, the P&F chart of WTI Crude Oil / RJ CRB Index did not give any P&F sell signals. The absolute price is now testing an important intermediate/long term support at around 60-70 range.
GOLD has a 6% weighting in the RJ CRB Index. The weight of the metals in the RJCRB Index is 20% including Aluminum, Copper and Silver. Gold broke above 350 levels in 2003. The breakout on the absolute price chart was followed by the breakout on the relative performance chart in 2005. The P&F chart of GOLD / RJ CRB Index, broke out of its downward trend with clear P&F buy signal. Gold prices reached to 1,030 level in March 2008. The long term trendline is at 650-670 range. Intermediate/Long term uptrend remains intact. Gold is outperforming the RJ CRB Index.
Copper has 6% weighting in the RJ CRB Index. After analyzing both WTI Crude Oil and Gold prices and the relative performances, Copper clearly differentiates itself with the negative technical outlook. Copper is actually a text book material for technical analysis. The double bottom formation and the breakout of the neckline in the beginning of 2004 at 95 level was followed by a clear P&F buy signal on the relative performance chart. Copper prices reached 416 level in May 2006. After a correction towards 250 level, Copper tested the 416 level again in 2008. This time the industrial metal formed a double top and broke down the neckline at 230 level. The sharp sell-off continued to the 167 level. The breaking down of the neckline at 230 was confirmed by a tripple bottom P&F sell signal on the relative performance chart versus the RJ CRB Index. Copper is technically weak and underperforming the major index.
Silver has a 1% weighting in the RJ CRB Index. It is in the precious metals group. However, because of its use in industry, the metal is more dependent on the economic cycles, unlike Gold. Gold has been the inflation hedge or the safe haven during economic instability periods.
Silver broke above 8.4 levels in 2005. The breakout on the absolute price chart was followed by the breakout on the relative performance chart in 2005. When compared to Gold, Silver lost its realtive outperformance versus the major index and gave a P&F sell signal after its rally towards 20 levels. The sell-off from 21.24 to 8.42 was sharp and fast. Silver found support at the previously broken resistance. Compared to Crude Oil and Gold, Silver is technically weak. However, because of its strong intermediate/long term supports it is technically stronger than Copper.
Assistant Vice President & Portfolio Management
Abu Dhabi Investment Company
Disclaimer: Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. Any and all ideas, opinions, forecasts, market analysis or market data, expressed or implied herein, are for informational purposes only and should not be construed as trading recommendations to invest, trade, buy or sell securities and or speculate in any specific futures contract, option or any other market. Any investments, trades, and or speculations made in light of the ideas, opinions, and or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. The market data contained herein is believed to be reliable, but has not been independently verified. Accordingly, such data cannot be guaranteed as to reliability, accuracy, or completeness, and as such is subject to change without notice. In no event will ADIC or any of its employees be liable for any information contained herein. Data Source: Reuters, Investopedia
Email this Article to a Friend