Bear Mountain Bull

We’ve been through this before (see here and here), and we’ll be through it again.

When looking at the recent move higher in oil prices, don’t ignore the rebalancing of the various commodity indexes. Just like rebalancing and retooling of stock indexes, it forces money managers that are trying to mirror those indexes to buy and sell the various components as the weightings are changed.

The Big Picture comments on the latest ‘moves’, starting by quoting Bill King:

…JP Morgan sees the most significant change coming in the DJ-AIGCI rebalance. Here the market weight of crude oil is expected to increase from 9.6 per cent to 13.8 per cent, gold from 10.8 per cent to 7.9 per cent, copper (COMEX) from 4.5 per cent to 7.3 per cent, live cattle from 6.4 per cent to 4.3 per cent and sugar from 4.7 per cent to 3.0 per cent. Meanwhile, S&P GSCI crude oil weight will go from 32 per cent to 33.8 per cent…Nevertheless, gold tanked on Monday on expectation of a weighting reduction of gold in the DJ-AIGCI Index …This harkens memories of July 2006 when Goldman greatly reduced the weighting of gasoline, which precipitated a huge collapse in gasoline prices ahead of the 2006 midterm elections.

I have no idea why the managers of these indices made these changes, but they are certainly curious.

I consider these contra-indicated: In a time of massive Fed credit creation and Treasury money printing, they oddly want less exposure to Gold. And with the worldwide recession getting worse, they want more exposure to Oil. Both of these are poorly timed macro-trades.

There are two things I can tell you about the index rebalancing: First, the last such contra-indicated changes were steamrolled over by the market, and cost investors in these indices to miss out on a huge move in Oil via the lower weightings.

Second, it won’t take long before people start to consider the political ramifications of goosing energy prices 2 weeks before the Obama administration is sworn in.

I have no clue what the motivation is for these moves, nor do I knows what what they were in 2006. But they are looking increasingly curious and ill timed. Once is a coincidence. Twice makes you pay close attention. After the third such move, expect to see the index managers dragged before a Congressional panel . . .