COMMODITY RALLY MAY BE TIRING NEAR JANUARY HIGH -- COPPER BACKS OFF FROM 200-DAY AVERAGE -- HOMEBUILDERS STALL NEAR JANUARY HIGH -- SO DO EAFE ISHARES -- EMERGING MARKETS ARE OVERBOUGHT -- MONEY IS MOVING BACK INTO PRECIOUS METALS

CRB INDEX TESTS JANUARY HIGH ... On Friday May 1, I wrote a message headlined: "The S&P 500 and CRB Index appear to be forming head and shoulder bottoms". A test of that bottoming theory would be a rally to their January highs followed by a pullback to form a potential "right shoulder". I wrote yesterday that the S&P 500 and several other market indexes had reached their January highs (and 200-day averages) and were likely to start experiencing some profit-taking. The same may be true with commodities. Chart 1 shows the CRB Index (through yesterday) also testing its January high. Since commodities and stocks have been rallying together since early March, any pullback in stocks from current levels would most likely be accompanied by a pullback in commodities as well.

Chart 1

BASE METALS AND AGRICULTURAL ETFS REACH RESISTANCE... The strongest part of the commodity group this spring has been industrial metals. That makes sense since they are the most closely tied to global economic trends. Chart 2 shows, however, that the Power Shares Base Metals ETF (DBB) is running into some selling at its 200-day moving average. That includes copper which has also reached its 200-day line as shown in Chart 3. Agricultural commodities have also been strong. Chart 4 shows the PS Agricultural ETF (DBA), however, testing its January high and its 200-day average. The DBA includes corn, wheat, soybeans, and sugar. Chart 5 shows the DB Energy ETF (DBE) trading just shy of its January high. All of those charts suggest that a pause in the commodity uptrend is likely and some profit-taking due. One exception to that trend may be precious metals.

Chart 2

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PRECIOUS METALS TURN UP ... Throughout the two-month commodity rally, precious metals have lost ground. Just as the commodity rally appears to be running out of steam, however, precious metals appear to be turning back up again. Chart 6 compares the CRB Index (top line) to the DB Precious Metals ETF (DBP) price bars since December. You can see them trending in opposite directions. The main reason for that is most likely the fact that gold acted as a safe haven as stocks and commodities fell during the early months of 2009. Once those two groups started rallying together in early March, traders took profits in precious metals. Chart 6, however, shows the DBE now trading at a two-month high and well above its moving average lines. That suggests to me that some money coming out of overbought commodities and stocks is starting to flow back into precious metal assets.

Chart 6

HOMEBUILDERS WEAKEN... One of the more encouraging signs for the stock market this spring has been the rally in hombuilding stocks. Chart 7, however, shows the S&P Homebuilders SPDR (XHB) pulling back from its 200-day moving average and chart resistance near its January high. That's similar to several other chart pictures that we're seeing in stock indexes, leading stock sectors, and commodities. We're seeing the same pattern in foreign stock markets.

Chart 7

EAFE ISHARES ARE UP AGAINST RESISTANCE AS WELL ... Chart 8 shows EAFE iShares (EFA) also testing their January high and 200-day average. [EAFE stands for Europe Australasia, and the Far East]. That has become an almost universal chart pattern at the moment. Major foreign markets that are testing their 200-day averages include Britain, France, Germany, and Japan. That's a logical spot to expect the global stock (and commodity) rally to encounter some profit-taking. Emerging markets have led the spring rally in global stocks (which is a positive sign). Chart 9 shows Emerging Market iShares (EEM) trading well above their 200-day line. The 20-day Commodity Channel (CCI) Index, however, shows impending weakness from a very overbought condition.

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GOLD STOCKS AND SILVER LEAD PRECIOUS METAL RALLY... Gold stocks are rising with precious metal prices. Some gold stocks are achieving impressive upside breakouts. Chart 10 shows Randgold (GOLD) breaking out to a new record high. Chart 11 shows IAMGOLD having broken a three-year resistance line. Chart 12 shows the Market Vectors Gold Miners ETF (GDX) on the verge of a new 2009 high. Silver is leading the precious metal advance. Chart 13 shows Silver iShares (SLV) closer to its February high than gold. Silver stocks are also doing well. Chart 14 shows Silver Standard Resources (SSRI) having exceeded its 200-day average and a major resistance line and on the verge of an eight-month high. With the stock market looking overbought at current levels, it appears that investors are turning to precious metals once again. That's not a bad idea.

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