Are Commodities Set To Rally

Short Side of Long, via Ritholtz:

Rogers Agriculture is now on the verge of breaking out of its downtrend (chart above). Sentiment is extremely negative within the sector with Public Opinion reaching bearish extreme levels or close to extreme levels on Wheat, Corn, Sugar, Coffee, Cotton and Live Cattle amongst others. We are still sitting close to hedge fund record net short positions in the Wheat market. Price is in the prices soy making a first higher low, despite media news constantly telling us the globe is oversupplied with Wheat - nonsense! The longs have been cut considerably in the Corn market recently as well. Contrary to the rest of the grains sector, Soybeans are extremely overbought now.

However, sentiment is especially negative in the Soft complex side of Agriculture, where the Dow Jones Softs Index (JJS) posted a 52 week new low on Friday. Sugar has now crashed, due to expectations of Brazilian output recovery in 2013. Hedge funds are cutting their net long positions in a hurry. The price is down 5 weeks in the row and approaching the physiological 20 cent support level. Coffee is down more than 40% over the last year and is now finding support on a 10 year rising trend line. Hedge funds are net short the Coffee market for the first time since 2008. Finally, Cotton and Coco are now building bottoms after being slaughtered last year and will soon rally. For those that do not use the commodity futures, another way to participate in the Agricultural story is through fertiliser names like Mosaic. Consider the chart below and notice that there have been now new lows since the selling climax of September 2011. Mosaic is currently down 40% from its peak in February 2011 and offers great value for a longer term investor who believes in the Agriculture fundamentals. Overall, I would expect the Agricultural sector - as well as all other commodities - to move up in coming weeks and re-enter a cyclical bull market. Commodities should be boasted by upside surprises in the Chinese economy, as infrastructure spending picks up in coming months. We could also see potential easing by the PBoC as inflation has now returned to more modest levels. Shanghai Composite could be discounting just that, as it flirts with the 200 day MA setting a stage for a break out higher. That too, would be very positive for commodities. Recent technical analysis newsletter I read from Jeffrey Zhang of Hong Kong based Trading Central Asia, suggested that "the index may be forming a so-called inverse head-and-shoulders pattern that could drive it [Shanghai Composite] up 17 percent should it break its 200-day moving average of 2,470."

I would bet the other way.  I would guess China will be weakening, along with the U.S., and Europe is already in the toilet.  U.S. ag has been rocking and rolling for four years now, and the music isn't going to play forever.  At some point, the funds are going to quit dancing.  I'm looking to lock in some fall prices, and we may need to look at 2013 too.