It has been a dramatic week in the markets, with the long oil and short financials trade reversing hard and a number of the relationships that have been intact for the past nine months being thrown into disarray.
As I have been maintaining since early in the year, speculative money is likely to be flowing into either commodities or equities, but not both. That basic premise has not changed, but what has been called into question is whether the second half of 2008 will be more friendly to commodities or equities.
I believe the answer to the commodities or equities conundrum is that it is still too early to tell, but commodities still have to be considered the preferred asset class. Two charts below tell a good deal of the story. The first graphic is a weekly chart of the Reuters/Jefferies CRB index, which is heavily weighted toward energy. It shows that the recent pullback in commodities is consistent with previous pullbacks and consolidation periods. Neither the magnitude nor the duration of the recent reversal in the bullish commodities trend suggests that the bull market in commodities is winding down.
The second chart last appeared on this blog two months ago. It reflects the ratio of the commodities basket in the Rogers International Commodity Total Return Index (RJI) to the SPX. [RJI is an ETF linked to the Rogers International Commodities Index that has a broad weighting, with less emphasis on energy than most commodity indices] The ratio chart also shows much more of a consolidation ongoing in the present market environment than a reversal.
Of course, one more week of soaring financials and plummeting oil prices will dramatically change the tone of the chart, but for now at least, consider the commodities trend to still be intact (and susceptible to buying on the dips), which means the case for a reversal in equities is still a weak one at this stage of the game.