COMMODITIES SUCCUMB TO PROFIT-TAKING
CRB LOSES MORE THAN 2% ... It was just a matter of time until commodities entered a much-needed correction. And today is the day. The Reuters/Jefferies CRB Index fell over 8 points (-2.3%) as 16 of the 19 commodities experienced selloffs. Most of the biggest losers are in the metals and energy markets which have experienced the biggest gains since the start of the year. Silver fell over -7% while gold fell 4%; aluminum and copper had losses of 2.9% and 3.7% respectively. Crude oil fell $2.50 (-2.4%) as other energy markets fell. With commodities under pressure, stocks tied to those commodities experienced heavy selling. The day's weakest stock groups are in basic materials, precious metals, and energy.
Chart 1
GOLD ETF GIVES SHORT-TERM SELL SIGNAL ... I recently showed how to apply the Parabolic SAR trailing stops to the streetTracks Gold Trust Shares (GLD). These are rising sell stops placed below a fast rising market. The dots below the price bars in Chart 2 show that a buy signal was given on March 27 and has been in effect until today. Prices have fallen below the initial sell stop just above 68 which is a signal to take some partial profits. The 9-day RSI has fallen back below 70 which is also symptomatic of a short-term peak. The three lines beneath Chart 2 are from the Directional Movement System. An uptrend exists as long as the green line (+DI) is trading over the red line (-DI). That's been the case since the last week in March and is still the case. The black ADX line, however, has risen over the upper line and has started to drop. That's usually a sign that an uptrend has come too far and is in need of a consolidation or correction. I suspect it will be the latter. That's also true of stocks tied to gold. Chart 3 shows the Gold & Silver (XAU) Index gapping down 5% today. It's broken the 20-day average for the first time in two months. And it's daily MACD lines have turned negative. It may find some support at its lower Bollinger Band and/or its 50-day moving average. I'd use any short-term bounces to do some partial profit-taking.
Chart 2
Chart 3
ENERGY ETFS ARE ALSO FALLING ... Stocks tied to energy are also experiencing profit-taking today. And initial support levels are being threatened. The Energy Sector SPDR (XLE) is trading beneath its 50-day average and is threatening its late April low at 55.25. A drop below the 50-day line is usually sufficient reason to do some selling. The Oil Service Holders (OIH) are also bearing down on their late April low at 151.86. Although the longer-range trend is still up, a drop beneath that support level (and 50-day line) would turn its short-term trend down. The daily MACD lines are already on a short-term sell signal.
Chart 4
Chart 5
MATERIALS SPDR BREAKS INITIAL SUPPORT LEVEL ... Basic material stocks are also falling today. The Materials Sector SPDR (XLB) is still testing its 50-day average. But it's already broken initial chart support at its late April low. And its daily MACD lines have turned down. Friday's heavy downside volume suggests that there's some serious selling behind the price downturn. I'd also recommend taking some partial profits in this group. All of the worst performing stocks are commmodity-related including Phelps Dodge (-6%), Freeport McMoran Copper & Gold (-5%), Alcoa (-4%), and Newmont Mining (-3%).
Chart 6
GROWING AVERSION TO RISK ... On Friday, I wrote that the stock market was giving sell signals. At such times, investors tend to become more risk averse. As a result, profits are being taken in those groups that have been market leaders all year which include basic materials, energy, and precious metals. [That also explains selling in small cap stocks and emerging markets like Latin America]. That's not necessarily a good thing for the market since it's now losing support from those former leaders. Some money is moving into the year's worst sector which is healthcare and traditionally a defensive sector. Chart 7 shows the Pharm Holders (PPH) bouncing off their 200-day moving average. The dollar is experiencing an oversold bounce which is contributing to today's commodity selling. I don't believe that the secular uptrend is commodities is over. But the size of their recent gains leaves them vulnerable to profit-taking. While I don't recommend selling all of one's natural resource holdings, it's clearly time to take some commodity money off the table. If you've been using trailing sell stops, some of those long positions have probably been sold already. If you're not doing any selling today, I'd recommend selling into any short-term bounce later in the week.
Chart 7
CNBC TOMORROW ... I'm scheduled to appear tomorrow afternoon (Tuesday) on CNBC sometime after 4:00. I'll let you know if I get a more specific time. Tune in just in case you've forgotten what I look like.
