Lessons from the Pros


GSCI – The Big Basket of Goods

Many traders reference the S&P 500 Index when trading individual stocks.  They will also reference the Dollar Index when trading the Spot Forex market.  But how many actually reference a Commodity Index before trading a Commodity Futures contract?

My guess is not many and the main reason is because they are not aware there is an Index just for Commodity Futures.  A trader would use a Commodity Index much in the same way as they would use any other Index to aid in making a trading decision or support of a trade setup.

If a Stock trader is looking to go long a stock he does well to look at the market as a whole by studying a basket of stocks to find the current trend of the major market.  Most traders like to trade in the direction of the major trend and knowing the overall market trend will help the individual stock trade.  Currency pairs are not much different.  If a trader would examine the Dollar Index they could find other individual currencies that are weaker or stronger than the Dollar Index and perhaps find some Spread trading opportunities.  The Dollar Index trend is significant to other assets as well, mainly Commodity prices.

An Index is simply a grouping of individual products (stocks, Futures, currencies, etc.) of that asset class to make a composite average of the grouping to measure the strength/weakness of that asset.

One of the more popular Commodity Indexes to follow is the S&P Goldman Sachs Commodity Index.  For traders using Trade Station you can use the symbol $SPGSCI to track this index.  The SPGSCI is available to trade using Futures or Exchange Traded Funds (ETF’s).  Warning:  The Futures contract has very low volume and may produce extreme slippage during volatile market moves.

The SPGSCI is a world production-weighted Commodity index with 24 different Commodities of what they feel are the major Commodity markets of the world.  This is the main reason there are many other Commodity Indexes around the world because not everybody agrees on which Commodity markets are the major players in the world.  The SPGSCI seems to have the largest following of traders so for this article I will use it as the benchmark index.  Weighting in a Commodity Index is no different than the weighting of the S&P 500 Index.  Look at how much weight Apple and Exxon have in the S&P Index, basically as Apple and Exxon goes, the S&P 500 goes.

Each year around January there is a rebalancing of the weighting inside the Index of individual Commodity markets.  Just like the Stock Indexes add and remove individual companies the SPGSCI does the same with individual Commodity markets.  For example, in 2014 the contract of Gas-Oil was removed and Low Sulfur Gas Oil was used to replace it due to length of contract life being too short.  These may sound like minor issues to most traders, but to the Commercial users of these products that can make a big difference in their bottom line each quarter.

The following table will show the first 8 major Commodities of the 2014 weighting of the SPGSCI:

WTI Crude


Brent Crude


Gas Oil L-S


Heating Oil








LME Copper


Many large investors use this type of Index to give them diversification in their large portfolios.   The institutions that maintain the SPGSCI are always long the markets in the Index.  This means every time a Futures contract expires that is in the SPGSCI that there will be a large exodus of long only positions from the expiring contracts and then into the next contract in the Futures contract cycle.  This is commonly referred to as the Goldman Roll that lasts for 4 days during the month prior to the contract expiration, usually occurring the 5th through the 9th business day of that month.

Figure 1 is a weekly chart of the $SPGSCI.

ddawson 20140520 - Fig-12

Fig 1

We can see how the broad Commodity markets have formed a triangle on this weekly chart and we are now coming into the apex of the pattern.  If traditional chart patterns hold true this triangle could be a continuation pattern for higher Commodity prices as a whole if we break out to the upside.  I am ready for some more Commodity market volatility, are you?

Since the majority of Commodity prices are in U.S. Dollars (dollars per gallon, bushel, ton, barrel, ounce, etc.) it stands to reason that the Dollar Index will have an impact on Commodity prices as a whole.  If the Dollar Index is trending down then foreign investors can purchase our Commodities for fewer dollars.  If the Dollar Index is trending up then foreigners with U.S. Dollars cannot buy as many Commodities.  Looking at Figure 2 we see the Dollar Index has been in a downtrend since January of 2014.

ddawson 20140520 - Fig-24

Fig 2

As we look at Figure 3 of the $SPGSCI we see an uptrend since January 2014.

Dollar Index has been in a downtrend since January of 2014

Fig 3

Perhaps the lower Dollar Index and the bullish weekly chart pattern is telling us that 2014 might be looking like an up year for the Commodity markets.  As investors around the world are always looking for the next place to invest capital for the best returns maybe we are seeing a switch from paper assets back to physical assets to resume our bull market in Commodity prices.

As a trader you might want to look at the $SPGSCI the next time you want to make a trade in the Commodity markets.  If you like to trade market correlations or inverse correlations then you might look to compare the Dollar Index to the $SPGSCI for some trade opportunities.  Regardless of your choice of how to use the SPGSCI it might be a good idea to keep on your radar screen to track the overall Commodity prices when you are doing your longer term market analysis.  Don’t forget, how many companies in the stock market make their money from Commodities?  If you follow the trend of the SPGSCI perhaps you can find that next stock ready to move up or down faster than your completion.

“Why are you trying so hard to fit in when you were born to stand out?” Ian Wallace

Don Dawson

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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