Here's what a Linear Regression Channel of the S&P GSCI® Goldman Sachs Commodity Index is Telling
S&P GSCI® Goldman Sachs Commodity Index is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures broadly diversified across the spectrum of commodities.
According to Goldman Sachs, the returns are calculated on a fully collateralized basis with full reinvestment. The combination of these attributes provides investors with a representative and realistic picture of realizable returns attainable in the commodities markets. A linear regression channel includes the linear regression line in the middle, with upper and lower channels at two standard deviations.
The Linear Regression Channel is a three-line technical indicator used to analyze the upper and lower limits of an existing trend. The Linear Regression Line is a straight line that best fits the prices between a starting price point and an ending price point. A "best fit"is a line down the middle is constructed where there is the least amount of space between the price points and the actual Linear Regression Line.
The Linear Regression Line is one of many ways to determine trend direction.
Investment managers view the Linear Regression Line as the fair value price for the future, stock, or forex currency pair.
When a price trend trends above or below the line, or the channel two standard deviations from the line, traders may expect prices to go back towards the Linear Regression Line since price trends that expand outside this 'normal' channel may be expected to swing the other way.
When a price trend below the Linear Regression Channel two standard deviations from the line, mean reversion trading systems consider it a good time to buy, and when prices are above the Linear Regression Line, a trader might sell, expecting the trend to eventually move back inside the channel as it did below.
Here we see the commodity index moved outside the channel in 20222, and the swung the other way getting very close to the lower channel.
Other technical indicators may be used to confirm these inexact buy and sell signals, but the Linear Regression Channel of the S&P GSCI® Goldman Sachs Commodity Index suggests we should expect some "mean reversion", or at least the trend stay within the channel range.
An example of another confirming signal is the index had trended down to the prior range of congestion in 2021, but didn't trend below it, which is positive.
Of course, we consider the trend in commodities, the stuff we buy like oil or coffee, to be an indicator of inflation.
Below is the index trend again with its 50 day moving average represented by the red line, and I highlighted so key inflection points of this inflation indicator.
There are many ways to observe directional trends. For now, the commodity index is trending up in the short run, but not yet in a primary uptrend.
Our objective is to identify trends early in its stage to capitalize on them until they change, so we use indicators to signal these inflection points.
Mike Shell is the founder, President, and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of Asymmetry® Managed Portfolios. Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies. Shell Capital provides investment advice and portfolio management to clients with separate accounts at Goldman Sachs Advisor Solutions with an investment management agreement. The observations shared on this website are for general information only and should not be construed as investment advice to buy or sell any security. This information does not suggest in any way that any graph, chart, or formula offered can solely guide an investor as to which securities to buy or sell, or when to buy or sell them. Securities reflected are not intended to represent any client holdings or recommendations made by the firm. In the event any past specific recommendations are referred to inadvertently, a list of all recommendations made by the company within at least the prior one-year period may be furnished upon request. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities on the list. Any opinions expressed may change as subsequent conditions change. Please do not make any investment decisions based on such information, as it is not individualized advice and is subject to change without notice. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but are not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. If this website contains information regarding Options Trading, please read the Characteristics & Risks of Standardized Options, also known as the options disclosure document (ODD). Options involve risk and are not suitable for all investors. The views and opinions expressed in Asymmetry® Observations and Asymmetric Investment Returns are those of the authors and do not necessarily reflect the position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.