RISING RATES AND FALLING STOCKS AREN'T GOOD FOR COMMODITIES -- NEITHER ARE FALLING BASIC MATERIAL STOCKS

FIRMER DOLLAR PUSHES COMMODITIES LOWER... Although commodities have been the strongest asset class since 2002, and while they remain in a major uptrend, they're not immune to a downside correction. We may be seeing the start of one right now. One hint at that is the recent heavy selling in commodity related stocks like basic materials, gold, and energy. Commodities have held up better than their related stocks up to now, but are starting to roll over as well. The reasons for that are threefold. One is Mr. Bernanke's hawkish comments on inflation yesterday (Monday) and the market's perception that short-term rates will continue to rise. That's giving a boost to the U.S. Dollar and is pushing commodity prices sharply lower today. The CRB Index is down more than five points with 18 of its 19 commodities in the red. The biggest percentage losers are silver (-5.2%), copper (-4.3%), gold (-2.6%) and aluminum (-2.5%). Another factor in the commodity selling is the continuing drop in the stock market which is also tied to rising interest rates. A falling stock market hints at economic weakness which usually results in weaker commodity prices. One reason for that is the fact that commodity prices (especially industrial metals) are cyclical in nature. Economically-sensitive cyclical stocks have been hit especially hard on the recent market selloff. Historically, rising bond yields are bearish for stocks. One sign of a market top is when money starts rotating out of late-cycle leaders like basic materials and energy and into defensive groups like consumer staples, utilities, financials, and healthcare. And that's pretty much what's been happening. That doesn't mean the commodity boom is over. It does mean that they're vulnerable to a correction within that longer range uptrend. That will be especially true if the stock market continues to drop. Chart 1 shows the Reuters/Jefferies CRB Index slipping beneath its 50-day average today (down arrow). There's a good chance that it may revisit its 200-day moving average before too long. Chart 2 shows the Materials Sector SPDR (XLB) also moving down toward its 200-day line. Its relative strength ratio has been falling for the last month. So far, the downside correction is only intermediate in nature. That will be the case as long as its 200-day average isn't broken. The same is true for the CRB Index.

Chart 1

Chart 2