Friday April 22, 2016
The Bull Market in Commodities Gets Underway
The Times, they are a changin’
Bob Dylan, 1964
The big money is made by properly investing at huge market turns, preferably those going up as there are so many investments geared in that direction. This was a most important week as was the last ten weeks for that matter. We are now at such a juncture. Let’s take a look.
Commodity Markets
We correctly forecast the drop in oil prices. Then we correctly forecast a bottom in oil prices due in January –February 2016. Since then Oil prices have moved from $26 to over $40. We are now in a new higher trading range of $40-$50, despite all the negative news about too much supply and Iran and Russia pumping like mad.
Three major commodity indices have just completed what we techies call a five waves up Elliott pattern. This indicates the start of a new trend in a new direction. The DBC commodities tracking fund, the Reuters Jeffries CRB Index, and the Goldman Sachs GTX Commodity Index (that’s the one on the CNBC display) all completed rallies beginning with the late January lows. The increase is 16-20% across the three. These indices are configured to reflect a broad array of commodity prices from crude oil to copper to sugar. The indexes are either now or about to challenge their 200-day moving averages, a well watched Wall Street Indicator. Energy and metals stocks are both enjoying significant rallies further making my case.
And certainly gold, silver, copper, and the energy complex are all in lockstep to the upside. The torrent of money that Central Banks have poured into their lackluster economies is now shoving up depressed commodity prices around the world.
If that is the case we should see it reflected in the credit markets as well.
Interest Rates
The interest rates on the five-year T Note rose 2.207% yesterday, a huge move for a normally subdued instrument. Rates also rose across the yield curve including the ten and thirty year bond. The rate on the five year note actually bottomed in the fall of 2012 around .6%. It has now more than doubled to 1.35% but still historically low.
Meanwhile rates have gone even lower over seas. Last week we saw a story that a Danish man had received a check from his own mortgage company on the amount he owed them! This is the result of negative interest rates now on display in Europe and Japan. Central Banks have finally thrown everything at deflation, now asking investors to take less than their principal in return for the ‘safety’ of such bonds. Bond prices move opposite interest rates. If interest rates begin climbing in earnest, it is hard to imagine just how low a negative interest bond could fall in value.
Dividend Plays
This sector in particular was walloped hard this week. The Dow Utility average fell 4.43% Thursday, a huge reversal from the fall lows. Utility stocks have been a rallying point for yield investors seeking respite from zero paying bank deposits.
A sample of Real Estate Investment Trusts indicates a 3% decline in price over the last two days. ICF and the DJ Real Estate Index are both displaying reversal patterns.
The Stock Market
We predicted that stocks were entering a bear market. The Transports topped in November 2014 and fell over 20%. But now many indices have rallied back, some but not all recapturing most of their 2016 decline. Was I wrong? I don’t think so. Stocks have displayed a Ten-week bottom to top time frame and this as the tenth week from the February 11th low. Apple has now dropped 20%.
The better description than bear market would have been that the bullish buy and hold tenor of the market had changed. Indices are moving up and down scores of points but not making new highs. The market will likely continue this up and down roller coaster the rest of this year.
A close under Dow 17,700 is needed to get things reversed. The 113 point drop Thursday might be the start of such a move.
Central banks have been wishing for a return of at least a whiff of inflation to get consumers spending again. They are about to get that wish filled the next few years. Bond buyers beware.
Follow Dennis at http://www.themarketperspective.com
TV commercials are hysterically diverse and all-inclusive; the Super Bowl halftime show was an upbeat celebration of cultural and racial unity; the backlash against HB2 is deafening; angry Trump rhetoric has died down; Harriet Tubman might end up on the $20 bill; people of all stripes and ages are unified in their grief for recently-deceased pop-culture icons; Elvis returns to the big screen to outwit the bumbling conservative; the Jungle Book is the top movie, Bigbang continues to lead TV,and the upbeat Drake has replaced the somber Adele at the top of the charts.
Question: How can the boys at EWI continue to call for collapses in the face of such overwhelming (though admittedly extreme) positive social mood? (March 22 Theorist: "1000 to 1500 down from here.") My position on the whole thing hasn't changed: Socionomics has been an outstanding, revelatory discovery, yielding insights which will guide my personal philosophy with laser-sharp focus the rest of my days; and I will continue to lose money following Elliot Wave calls.
Posted by: mike phillips | April 22, 2016 at 03:14 PM