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Commodities Déjà Vu

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The best times to buy are when fear has taken over, and that is happening right now in commodities markets.

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The more things change, the more they stay the same. So the saying goes because it's true. There are also a number of events in our lives that we'd like to relive and a host of other times we'd rather forget. Such is the nature of life.

Our minds are constantly multitasking, and thank God they are or else we'd collapse into a heap. But sometimes our minds are racing ahead of the moment and we have to play catch-up. The French refer to this as déjà vu, or "already seen." You get the feeling that you've already been there in a particular circumstance, and one explanation is brain overload causing you to think you're re-experiencing something that is actually happening right now.

Traders and investors experience déjà vu all the time, but it may not be as much from overload of the cerebral cortex as much as from the fact that markets tend to follow patterns. This is, of course, the basis for technical analysis, as chartists pore over the patterns of today's markets against known patterns in past markets -- all in the pursuit of clues as to what the market will do today, tomorrow and next week.

But you don't have to be a practitioner of technical analysis to see patterns repeating in the markets, and this past week's example was just too irresistible to pass up.

From Funhouse to Haunted House

We all remember how painful the May meltdown was in the stock market. As the Dow traded to highs for the first half of 2006, it seemed like that old trading adage "sell in May and go away," would be crushed by the positive sentiment and money flow. But then May 11 came along and the bears turned our funhouse into a spook house.

The selling was so virulent that investors began pulling money from mutual funds at a faster and faster pace. Suspicions quickly arose and rumors circulated that hedge funds were also getting redemption notices, meaning they were being forced to liquidate positions to meet their capital calls. A quick look at the volumes of trade in the S&P 500, Russell 2000 (small-cap stocks) and Nasdaq-100 certainly supports the premise that big firms were indeed hitting bids as they hit the exits.

To quote the great philosopher Yogi Berra, "It's déjà vu all over again." This time, it's in the commodity markets. What had been a perfect storm for oil and gold investors soured faster than Notre Dame's championship season, as the Israeli/Lebanese fighting ended and the hurricane season failed to muster anything more than torrential rains on the Eastern United States.

Since the wholesale selling in the commodity markets began, barely a day goes by that a reporter doesn't call me to see what I'm hearing about this hedge fund blowup or that forced liquidation. If these types of headlines don't sound familiar, you haven't been paying attention.

So what's the takeaway from this latest déjà vu? It's that the best times to buy are when fear has taken over, and that is happening right now in commodities markets. As we are closing in on the end of the third quarter, I think we should see some sort of blowoff in the next week to 10 days. Amaranth (the $5 billion hedge fund blowup) will be the first and perhaps biggest of many in this space to be overextended.

The question, then, for commodity traders will be whether the three-year run in commodities is over or just experiencing a correction. But, as usual, that's a question for another day.
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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