COMMODITIES ARE AT LOWEST LEVEL RELATIVE TO STOCKS IN HISTORY -- COMMODITIES HAVE A LOT OF CATCHING UP TO DO -- THAT PROCESS MAY BE BEGINNING -- CRB INDEX MAY BE NEARING UPSIDE BREAKOUT -- GLOBAL METALS AND MINING PRODUCERS ETF REACHES THREE-YEAR HIGH
COMMODITIES ARE HISTORICALLY VERY CHEAP VERSUS STOCKS... I suggested yesterday that commodity prices (and stocks tied to them) usually do better in the later stages of a business cycle as inflation pressures start to build. We may be entering that stage. One of the reasons why investors may be turning toward commodity assets is that they're currently the cheapest in more than half a century relative to stocks. Chart 1 compares the Reuters/Jefferies CRB Index (brown bars) and the S&P 500 back to 1957 when the CRB was created. Chart 1 shows that commodities have gone through long periods of strength and weakness. They surged during the hyper-inflationary 1970s then fell for two decades between 1980 and 2000. They rose strongly between 2002 and 2008. but it's been downhill since then. By the start of 2016, the commodity index had fallen to the lowest level since the early 1970s. But its chart pattern suggests that higher prices may be in store (more on that shortly). My main purpose here, however, is to show how cheap commodities have become relative to stocks.
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Chart 1
CRB INDEX IS AT LOWEST LEVEL IN ITS HISTORY RELATIVE TO STOCKS... The solid line in Chart 2 is a relative strength ratio of the CRB Index divided by the S&P 500. The ratio is at the lowest level since the CRB Index was created in 1957. The ratio's 14-month RSI line remains in deeply oversold territory below 20 which matches a similar oversold situation prior to 2000 (see circles). That previous oversold condition preceded a major upturn in commodity prices after 2000. Chart 2 shows that commodities are historically cheap relative to stocks. What we're looking for now is some chart sign that commodities are starting to do better on both an absolute and a relative basis.
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Chart 2
COMMODITY/STOCK RATIO MAY BE BOTTOMING... The weekly bars in Chart 3 give a closer look at the CRB/SPX ratio for the last two years (plotted through yesterday). Two things are worth noting. First, the 14-week RSI line (solid line) is rising faster than the ratio which is a positive sign. Secondly, the ratio may be forming a "double bottom" (see circles). That may be the first sign that the tide is starting to turn in favor of commodities. The daily bars in Chart 4 give a closer look at that potential "double bottom" in the CRB/SPX ratio (through yesterday). To signal a relative strength bottom, however, it still has to clear its August/November peaks. And it needs to clear its 200-day moving average. The CRB Index itself also needs to achieve a bullish breakout of its own.
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Chart 3
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Chart 4
CRB INDEX APPEARS TO BE BOTTOMING... The weekly bars in Chart 5 show the Reuters/Jefferies CRB Index in an apparent bottoming formation that began at the start of 2016. A secondary bottom formed this summer was higher than the first which is a positive sign (rising trendline). The price bars appear to be heading back up for a challenge of the peaks formed in spring 2016 and early 2017. A decisive close above those twin peaks would confirm a commodity bottom. That rising price trend is supported by the blue 10-week average being higher than the red 40-week line. In addition, the 14-week RSI line (top of chart) has climbed over 50; while weekly MACD lines (below chart) are positive (see circle). A decisive upside breakout on its price chart would most likely draw even more attention to commodity markets and stocks tied to them.
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Chart 5
GLOBAL METALS & MINING PRODUCERS ISHARES REACH THREE-YEAR HIGH ... Mining stocks have been the biggest beneficiaries of money flowing into commodities. My message from October 5 discussed the relative merits of various mining ETFs. My favorite then and now is the MSCI Global Metals & Mining Producers iShares (PICK). The weekly bars in Chart 6 show the PICK rising to the highest level in three years. Its relative strength ratio plotted against the FTSE All World Stock Index (gray line) is on the verge of a three-year high of its own. What makes this ETF unique is that it includes large foreign miners that have done better than most miners in the U.S. Countries with the two biggest weightings are Australia the U.K. Its biggest holdings are BHP Billiton (BHP), Rio Tinto (RIO), Glencore (GLEN.L), Vale, Anglo American (AAL.L), and Freeport McMoran (FCX). Another reason for its superior performance is that it excludes gold and silver stocks which have been mining laggards during 2017. Most important of all, the global mining ETF is in a strong uptrend.
