CRB INDEX BREAKS 200-DAY AVERAGE AS CRUDE OIL FALLS TO TWO-MONTH LOWS -- FALLING COMMODITIES CARRY MESSAGE OF LOWER INFLATION AND A WEAKER ECONOMY
CRB BREAKS 200-DAY AVERAGE ... I wrote yesterday about recent selling in commmodity pits pushing the Reuters/Jefferies CRB Index into a test of its 200-day average. Today's five point drop has pushed it below that long-term support line in pretty decisive fashion (see red arrow). Chart 1 shows the CRB peaking in early May at 366 and bottoming in mid June at 329.61. The July rally attempt fell short of its May peak thereby leaving a pattern of "lower tops". Today's price drop puts the CRB in danger of breaking its June low. If it does, it will initiate a pattern of "lower peaks" and "lower troughs" which is symptomatic of a peaking market. That would be the first significant sign of a commodity top in five years. Although most commodities are falling today, the biggest weight on the CRB is coming from the energy sector.
Chart 1
CRUDE OIL FALLS TO TWO-MONTH LOW... Crude oil futures prices have broken their late July low and have fallen to the lowest level in two months (Chart 2). Gasoline and heating oil are falling along with natural gas. Chart 3 shows the sharp drop in gasoline futures prices over the last month. Why that's so important is because energy accounts for nearly 40% of the Reuters/Jefferies CRB Index which contains nineteen commodities. That may seem like an unusually heavy weighting, but it's meant to acknowledge the extremely important role that energy prices play in inflation and economic growth. Energy isn't the only group dropping today. Fourteen of the nineteen commodities are in the red including copper, gold, and silver. The breakdown in commodities carries a dual message. One is that inflation pressures are moderating. The other message is that the economy is weakening. That was confirmed by today's Leading Economic Indicator report which was negative for the month of July. Economic slowing isn't necessarily good for the stock market. The stock market at the moment, however, is focused on the fact that lower inflation and economic slowing will keep the Fed from raising interest rates any further. Hence, falling commodities are helping push the bond and stock markets higher.
Chart 2
Chart 3
GOLD AND SILVER SELLOFF ON DOLLAR BOUNCE ... A $14 drop in the price of gold is pushing the StreetTracks Gold Trust Shares (GLD) back beneath its 50-day moving average. Silver, which has held up better than gold, is also slipping. Chart 5 shows the Silver Trust iShares (SLV) nearing a test of its mid-August low at 117.76. Its daily stochastic lines have started to weaken from overbought territory over 80. In addition to general CRB selling today, commodities are also being hurt by a bouncing dollar. Chart 6 shows the Euro falling today as the dollar rises. That's especially negative for gold. Precious metals stocks are also in the red today -- as are energy stocks -- and are making commodity-related stocks the day's weakest groups.
Chart 4
Chart 5
Chart 6
HOW TO BLEND GOOD AND BAD NEWS ... At the moment, the stock market appears to be focused on the good part of the commodity breakdown, which is lower inflation. Unfortunately, the part about economic slowing isn't necessarily good for stocks over the long run. Which is why I find it hard to get too enthusiastic about the current runup in stocks. I'm inclined to view the recent rally to three-month highs as part of trading range bounded by the May highs and the June lows. Rather than turning bullish, I've shifted from a bearish to a more neutral stance for the time being -- although I've recommended covering most bear positions and some selective nibbling on the long side. It looks like the right time, however, to lighten up on commodity holdings.
