Brace for big commodities drop, traders warn

After a great few weeks for the commodities trade, it's now time to get out, some strategists say.

The commodities trade is "not only being hit cyclically, but it's also being hit fundamentally, so I would expect a decline over the next month," Phillip Streible of RJO Futures said Friday on CNBC's "Trading Nation."

Strong gains across oil, copper, gold and other commodities have made for a very profitable month for bulls. In fact, March was the first positive month for the S&P GSCI total return commodities index since October, and the best March since 2006.

But Streible said that after riding recent gains, traders are repositioning more defensively as the Federal Reserve readjusts to a more dovish stance.

"We saw a lot of profit-taking come in in the first day of the [second] quarter," said Streible. "We've seen a lot of anticipation that the Fed will go on that two-hike cycle."

And from a technical perspective, commodities such as oil and copper have merely enjoyed a minor bounce in the midst of a long-term downtrend, Streible said.

Meanwhile, in the near term, "if you look at the peak that's in place, we're starting to decline," the trader said. "Strength to the downside is building."

Trouble in commodities could, in turn, cause trouble for the materials sector.

S&P Investment Advisory chief investment officer Erin Gibbs says the materials sector could see significant downside sparked by oil weakness, stabilization in the dollar and the expectation of a weak earnings season ahead.

Over the past year, the daily moves of the Materials Select Sector SPDR Fund (XLB) have had a 0.5 correlation with the commodity index, a bit higher than the 0.4 correlation between the S&P 500 ETF (SPY) and commodities.

The biggest problem, however, could be earnings. In the second quarter, materials companies are expected to suffer an earnings drop of 7 percent, according to data from S&P, which Gibbs views as another reason to shy from the names.

Videos

Trades to Watch

Trader Bios

About

Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

Read more

Connect