near end of recovery rally
Published March 1st, 2012 - Reprints
current bear market rally in overall commodities should
be nearing an end as the final phase of the current
bear market takes hold. In the majority of the agricultural
complex, supplies will be increasing over the next crop
cycle. That is bearish. Remember, that a necessary part
of an extended bear market is to periodically provide
violent snap-back rallies to keep the bulls alive and
make sure the bears do not become too complacent. Parabolic
rises or falls in prices lead to very short duration
V-shaped bottoms/tops that quickly reverse.
of the money flows are showing the kind of bullish reversal
vigor that tends to precede major bull market moves.
This means that another sharp down move in commodities
as group is imminent and likely will reach the 500 level
in the Continuous Commodity Index (CCI) before presenting
the next great buying opportunity for long-term commodity
investors. China’s economic hard landing appears to
be the elephant in the room that is not being discounted
adequately in most commodity markets at this time. Before
delving into the reasons why this hard landing should
be expected, let’s take a look at the numerous non-confirmations
in the market right now.
you look strictly at the stock market performance as
measured by the S&P 500, you would get the impression
that a major long-term bull market is unfolding. This
suggests that all is well with the world, that an accelerating
global economy is unfolding and the boom times in emerging
economies are about to take orbit. If this were true,
then commodities also would be seeing a booming global
economy, surging demand potential from Asia/China and
would be benefiting from an increase in liquidity of
the monetary system, which should put extreme pressure
on the U.S. Dollar Index. That so far has not happened.
The chart below shows the ratio of the CCI to the S&P
500. For the better part of the last decade, commodities
have been in a bull market and have outperformed the
S&P 500 by a ratio of more than 3:1.
outperformance is a direct response to the stagnant
U.S. economy in relation to the comparatively booming
Asian economies. Since the autumn of 2011, commodities
have had one of their worst performances relative to
the S&P 500 seen this decade. This is startling.
While stocks are seeing reflationary boom times, commodities
instead continue to suggest a continuation of the current
deflationary bust. This strongly suggests that all is
not well in Asia and emerging markets, and questions
how long the current U.S. economic decoupling mantra
can stay intact.
is even more amazing is that with stocks near highs last
seen in the spring of 2011, the U.S. dollar remains well
above its lows and remains in a bull market trend. This,
despite the stock market strength, continues to show that
global capital continues to seek the U.S. dollar for safety.
This is only the second time this decade
that we have seen these two markets diverge from their
well-established, decade-long inverse relationship.
The U.S. dollar remains well above lows seen in May
2011 when the stock market last saw current levels.
This shows that global liquidity remains very tight
despite the European Central Bank’s quantitative easing
program. The U.S. dollar remains in a healthy uptrend.
Look for a major spike up in the near future.
We can play our bearish outlook on commodities
in either of two ways: Picking out those markets that
we feel are most vulnerable or finding a proxy for a
strong downward move in commodities. Given the dollar’s
current upward bias and its negative correlation to
the commodity sector in general, a long dollar play
may be the best way to take advantage of the end of
the recovery rally in commodities.