Do commodities lead equities?

Little do most lay investors realise that they can use commodity prices to forecast the price movements of their share portfolio. Investment analyst Vijay L Bhambwani explains how

The subject of this article is as interesting to an investor as the question of viability of AMD vis-a-vis Intel for a computer buff. While Intel remains the first choice for almost every PC maker, the fact remains that AMD continues to survive and thrive.

In the case of an argument for commodities, ironically, commodities is actually a bigger business and is invariably influencing equity market trends more significantly than people tend to realise.

We all know that commodities are raw materials for the corporates to manufacture their finished goods. These corporates are publicly traded entities whose shares we buy and sell on our bourses.

Raw material prices will and do impact their profitability and therefore need watching. There are other aspects to commodities that need to be understood to enable more profit making opportunities count for investors / traders.

Consider the following:
	According to a study by Ron Insana (CNBC, USA) anchor and market analyst, prices of bullion in conjunction with the DJIA (Cbot) can be a very accurate advance indicator of interest rate hikes ahead of the FOMC meets.
	Prices of bullion have been moving peculiarly ahead of most major wars, terror attacks and major political events. In advanced financial markets like the present scenario, insiders who are privy to price sensitive information will, and do take advantage of opportunities.
	Commodity prices have been a fairly accurate indicator of the weather - ask any trader of cotton or orange juice futures in the US
	Commodity prices are a barometer of the state of the global economies. Copper is known to be the "tin roof " of the economies. Prices of this metal have been an accurate enough indicator of when economies are booming or decelerating. The past 18 months are more than adequate experience.
	The prices of crude oil, natural gas and refined fossil fuels determine corporate profitability ranging from oil marketing companies to automobile manufacturers. It also decides how much we pay for lighting up our homes and pay for our commuting expenses.

Insana narrates an interesting anecdote of how commodity prices even helped warn of a political crisis! After the Chernobyl nuclear meltdown in Ukraine (widely regarded as the bread basket of Russia), the authorities were forced to burn wheat within a large radius of the nuclear fallout.

Fearing a shortage of bread, the Russian government clamped a curfew on media reporting of the event and started covering wheat forward contracts on the US commodity exchanges.

Prices of wheat were jumping in a season where such price action was not warranted. Deeper investigation showed buying from the Russians and media speculation about a possible war or famine threat in Russia finally forced the Russian governmentt to disclose the Chernobyl incident.

Closer to home, I have been tweaking my systems to provide a "black box" type signals whenever commodity prices can possibly provide trading opportunities in equities.

Note the following:
	Cotton prices impacting share prices of Arvind Mills. The correlation is inverse
	Gold prices impacting share price of Titan Industries. The impact is directly proportionate
	Crude oil prices impacting share prices of HPCL, BPCL and IOC. The impact is inversely proportionate
	Copper and Aluminium prices impacting share prices of Sterlite, Hindalco and Nalco. The impact is directly proportionate
	Rubber prices impacting share prices of Ceat, MRF and Apollo Tyres. The impact is inversely proportionate
	Sugar prices impacting share prices of Balrampur Chini, Bajaj Hindustan, Sakthi Sugar and Bannari Amman among others. The impact is directly proportionate
	Zinc prices impacting the share prices of Hind Zinc. The impact is directly proportionate
	Steel prices impacting the share prices of Tisco, SAIL, Jindal Steel etc. The impact is directly proportionate

The permutations and combinations are endless and the results are amazingly accurate. With some experience and dollops of discipline, I don't see why traders cannot multiply their profits manifold by incorporating regular commodity tracking systems in their trading game plan.

Have a profitable day!

The author is a Mumbai-based investment consultant and commodity trader.