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Basic materials.  Where would we be without them?  Outside mostly, I guess. Anyway, despite the undeniable importance – and tangible value of – basic materials, like everything else there is a time “hold ‘em” and a time to “fold ‘em.”  So let’s take a look at one – admittedly crude – method for determining what time it is at any given, er, point in time.

The First Key to Materials Price Trend

The first key to the price trend for materials is, well, the price trend for materials.  For our basic crude purposes we will use the 5-week and 30-week moving average for ticker RYBIX (Rydex Basic Materials fund). If the 5-week MA is greater than the 30-week MA our price trend indicator is bullish and vice versa.  As a “stand alone” indicator, this one ranks in the “Good, not great” category.  Figure 1 displays the growth of $1,000 invested in RYBIX when the 5-week MA is above the 30-week and vice versa.

(For the record there is a 1-day lag in trading – i.e. – if a crossover occurs on Friday’s close the trade in RYBIX takes place at the closing price of the next trading day).Figure 1 – Growth of $1,000 invested in RYBIX when RYBIX 5-week MA > RYBIX 30-week MA (blue line) versus 5-week MA < 30-week MA (red line); 4/14/1998-10/14/2016

For the record:

*$1,000 invested in RYBIX when the trend indicator is bullish grew to $2,508

*$1,000 invested in RYBIX when the trend indicator is bearish fell to $615

The Second Key to Materials Price Trend

The second part of our model is the action of the U.S. Dollar.  Materials prices tend to move inversely to the price of the U.S. Dollar (I would offer an explanation but it is one of those boring topics that runs the risk of causing readers to stop reading before they get to the good part – so I’ll not take that chance (may I suggest Google?).

From 1998 (when RYBIX started trading) until the end of 2008 I used U.S. dollar futures (ticker DX) as an “inverse” indicator – i.e., if DX 5-week MA is below its 30-week MA that is “bullish” for materials and vice versa.

Since at the end of 2008 I have used ticker UDN (Powershares U.S. Dollar Index Bearish fund). UDN and RYBIX trade with a high degree of correlation.  When the 5-week MA for UDN is above its 30-week MA that is “bullish” for materials and vice versa.

Figure 2 displays the growth of $1,000 invested in ticker RYBIX when our “Dollar Model” is bullish versus bearish.Figure 2 – Growth of $1,000 invested in RYBIX when UDN 5-week MA > UDN 30-week MA (blue line) versus 5-week MA < 30-week MA (red line); 4/14/1998-10/14/2016

For the record:

*$1,000 invested in RYBIX when the trend indicator is bullish grew to $3,308

*$1,000 invested in RYBIX when the trend indicator is bearish fell to $466

Putting the Two Together to create a “Materials Model”

For RYBIX: if the 5-week MA > 30-week MA then add +1

For UDN: if the 5-week MA > 30-week MA then add +1

So for any given day, the “Materials Model” can read 0, +1 or +2.  To make a long story short, the only time to bother holding materials is when the Materials Model reads +2.

Figure 3 displays the weekly charts for UDN and RYBIX with the 5-week MA and 30-week MA. Our “Materials Model” is bullish when the green line (5-week MA) is above the red line (30-week MA) in BOTH charts.Figure 3 – Tickers UDN and RYBIX with 5-week and 30-week moving (Courtesy AIQ TradingExpert)

Figure 4 displays the growth of $1,000 invested in ticker RYBIX when the Materials Model = +2 versus when the model is at 0 or 1.Figure 4 – Growth of $1,000 invested in RYBIX when “Materials Model” = +2 (blue line) versus when Model < +2; 4/14/1998-10/14/2016

For the record:

*$1,000 invested in RYBIX when the Materials Model is +2 grew to $3,965

*$1,000 invested in RYBIX when the Material Model is < +2 fell to $389

Summary

So this model is inarguably crude.  Still, as a proud graduate of “The School of Whatever Works” (good ole’ SWW) the difference between a return of +297% versus a loss of -61% is enough to get my attention.

As you can see in Figure 3, at the moment the price trend indicator is “bullish” and the dollar indicator is “bearish.”  Until they are both bullish I will stand athwart the “materials world.”

Jay Kaeppel