RECENT PULLBACK IN COMMODITIES IS LIKELY TIED TO STOCK CORRECTION -- COPPER AND OIL ARE STILL IN UPTRENDS -- AND GOLD MAY BE NEAR A BULLISH BREAKOUT -- GOLD MAY GET AN ADDITIONAL LIFT FROM THIS WEEK'S BULLISH BREAKOUT IN THE YEN TO A FIFTEEN MONTH HIGH
COMMODITY PULLBACK IS TIED TO STOCKS... My January 27 message wrote about a bullish breakout in commodity prices to the highest level in two years. I took that as another sign that inflation pressures were starting to build. The weekly bars in Chart 1 show that bullish breakout taking place in the Bloomberg Commodity Index (circled area). During February, however, commodity prices have sold off enough to call that upside breakout into question. In my view, it probably doesn't. Commodity prices have been rising on signs of a growing global economy which increases demand for raw materials. As a result, commodities and stock prices have been more or less rising together over the past two years. That was especially true since last June when commodity prices turned up (brown arrow). The daily bars in Chart 2 show, however, that the commodity drop during February coincided with a 10% drop in the S&P 500 (blue bars). The 20-day correlation between the two markets jumped to .90 during that selloff. Chart 2 also shows the BCOM bouncing off its 200-day moving average last Friday as did the S&P 500 (red arrow). Both are rising together this week. Economically-sensitive industrial metals are leading the commodity recovery this week (while crude oil lags behind). Gold is also starting to play a leading role in the commodity revival.
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Chart 1
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Chart 2
COPPER AND OIL ARE STILL IN UPTRENDS... Copper and oil are two of the most economically-sensitive commodities. And their direction tells us a lot about the direction of commodity prices. Right now, both of their trends are up. The weekly bars in Chart 3 (plotted through Thursday) show copper nearing another three year high after suffering a modest setback during February. It also remains well above its 40-week moving average (red arrow). The weekly bars in Chart 4 show WTIC Light Crude Oil (through Thursday) also experiencing a modest setback during February. But not enough to seriously threaten its major uptrend. WTIC remains well above chart support near $55 and its 40-week average. Both of which bode well for the future direction of commodity prices. That's especially true for the price of gold.
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Chart 3
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Chart 4
GOLD IS OFTEN A LEADING INDICATOR FOR OTHER COMMODITIES ... Ever since the hyper-inflationary decade of the 1970s, gold has either led or participated in every important commodity upturn. I can't find one instance when commodity prices rose without gold. And I doubt if 2018 will prove to be the exception. The weekly orange bars in Chart 5 show the price of gold (through Thursday) appearing to be on the verge of a major bullish breakout (see circle). The brown line is a ratio of gold divided by the Bloomberg Commodity Index. The ratio bottomed during 2014 and has been rising ever since. The ratio rose again last year and is doing the same during 2018. [Gold has risen faster than copper or crude oil since the start of the year, while commodity prices have been flat]. It's usually a bullish sign for commodity prices when gold is doing even better. Gold and other commodity prices have something else working in their favor. And that's a rising Japanese yen.
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Chart 5
JAPANESE YEN SURGES TO 15-MONTH HIGH ... The weekly bars in Chart 6 show the Japanese yen surging this week to the highest level in fifteen months. Looking at the chart going back to 2015, it looks like the Japanese currency is going through a major bottoming process. That's potentially negative for the U.S. dollar. That's because the yen is the second biggest currency in the Dollar Index (13.6%), which is second only to the Euro's 57%. But it's also potentially good for gold. Remember that a weak dollar is bullish for gold since they usually trend in opposite directions. That means that gold usually trends in the same direction as foreign currencies like the yen. That's why the upside breakout in the yen is potentially bullish for gold. The monthly bars in Chart 7 show a close visual correlation between the two markets over the last ten years. Both peaked together during 2012 and bottomed together during 2015. And they may achieve bullish breakouts together this year.
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Chart 6
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Chart 7
S&P 500 HAS REGAINED 62% OF PREVIOUS PRICE DROP... The stock upturn that began last Friday for the S&P 500 at its 200-day moving average has carried through this week. The hourly bars in Chart 8 put this week's upturn in some perspective. The good news is that the SPX is trading above initial overhead resistance at 2727 and its 50-day average at 2725 (not shown). What concerns me a bit is that it has retraced 62% of its plunge from the January 26 top to last Friday's bottom (red arrow). And its 14-hour RSI line (top of chart) has reached overbought territory over 70 for the first time this month (black arrow). In addition, there's often a correlation between the number of days the market has dropped versus the number of days it's rallied. The market fell for ten days from peak to trough. And it's been rising for six days (a two-thirds retracement). While there's a strong chance that the market has bottomed, this week's rally is beginning to look over-extended. Some retracement of this week's gains may be in store.
