COMMODITIES MAY HAVE PEAKED FOR NOW -- WEEKLY AND MONTHY CHARTS SHOW OVERBOUGHT COMMODITIES IN NEED OF A CORRECTION -- COMMODITIES ARE TOO HIGH RELATIVE TO STOCKS

SHORT-TERM SELL SIGNALS GIVEN ... This week's downturn in crude oil prices has had a depressing effect on the entire commodity group. Chart 1 shows the CRB Index (plotted through Thursday) breaking a three-month up trendline (and its 50-day moving average). The 12-day Rate of Change (ROC) line (top of chart) has fallen to the lowest level in more than three months. And the daily MACD lines (bottom of chart) have turned negative after forming a "double top" between March and July. The minimum downside target is most likely a test of the 400 level which would test a yearlong support line and the early May low. I wouldn't, however, rule out a further drop to the March low at 380. The weekly CRB chart also suggests a very over-extended market in need of a correction.

Chart 1

WEEKLIES SHOW NEGATIVE DIVERGENCE ... The weekly bars in Chart 2 plot the last major CRB advance that started at the beginning of 2007. Notice the negative divergences on the weekly RSI line (top of chart) and the weekly ROC line (bottom of chart). Those are the first serious negative divergences that have formed since the latest upleg began more eighteen months ago. A RSI drop below 50 and a ROC drop below its zero line would confirm a commodity top of intermediate proportions. The Fibonnaci retracement (horizontal) lines show that a drop to 400 and 380 would represent retracements of 38% and 50% respectively. Those seem like reasonable downside targets.

Chart 2

MONTHLY RSI IS OVERBOUGHT ... The monthly bars in Chart 3 show the spectacular CRB advance since the start of 2002. The 14-month RSI line, however, shows that the CRB is now in the most overbought level since 2005. That certainly doesn't signal that the long-term commodity boom is over. It does, however, suggest that the commodity rally is over-extended and in need of some correcting.

Chart 3

COMMODITIES PEAK DURING BEAR MARKETS ... At the end of an economic expansion, stocks usually peak before commodities. If stocks enter a bear market (and a recession starts), commodities usually enter a downside correction as well. [Hence recent calls for economic slowing to cause "demand destruction" in crude oil and lower prices]. During the stagflation years of the 1970's for example, serious downturns in stocks caused profit-taking in commodities. The commodity rally resumed after the stock market and the economy turned back up again. Chart 5 compares the S&P 500 (black line) to the CRB Index (orange line). It's been a year since the topping process in the stock market started. With stocks having reached the bear market threshold of 20%, the time seems ripe for commodities to enter a corrective phase.

Chart 4

COMMODITES ARE TOO HIGH RELATIVE TO STOCKS ... Chart 5 plots a ratio of the CRB Index divided by the S&P 500 over the last ten years. Commodities have done much better than stocks over that decade. What catches my eye, however, is the fact that the ratio's RSI line (top of chart) has reached overbought territory over 70 for the first time in more than five years (see arrows). At the very least, that suggests that the pendulum has swung too far in favor of commodities. The last time that happened near the start of 2003, stocks outperformed commodities for the next four years. I'm not suggesting here that stocks will do that again. But it does seem to suggest that commodities are too high relative to stocks. That seems to support the idea of lower commodity prices.

Chart 5