Friday, July 18, 2008

Are Commodities Reversing or Consolidating?

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.


31 comments:

Anonymous said...

Looks to me as 5 waves up. Now, the correction.

I think commodities are heading down, and may have peaked. An attempt at a double top is likely, though.

transformation said...

thank you. excellent. i humbly note, that the graph on the R is falling off the chart (hidden from view or cut off prematurely). i know how hard this is, having done a LOT of blogging here and used stockcharts.com alike. dk

Bill Luby said...

Hi dk,

I'm afraid my graphics are not compatible with all monitors -- I apologize for the inconvenience.

The easiest workaround is to right click on the image, highlight "Copy Image Location," and paste the link into a new browser window.

I hope this helps.

Cheers,

-Bill

transformation said...

thank you Bill. best regards, dk

Anonymous said...

Commodities had a similar short-squeeze drop back during the Bear Stearns bailout. I am betting (literally) you are right: Both the upward trend of commodities and the downward trend of stocks are intact.

Stunning how quickly this week's fierce but evanescent snapper rally reverted $VIX:$VXV to the mean.

Anonymous said...

The difference I see now is that $CRB fell below the trend line which supported it at the January, May and June lows. And, on a daily basis, it fell bellow the 50 EMA for 2 days now. So, unless it recovers 50 EMA and the trend line in the next 2 days, I would say this time is different.
The definitive proof of a trend change would be a penetration of the 420 supporta and failure to recapture 420. This would mean falling in the previous Darvas box with support around 370.

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