Commodities Have Stopped Going Down... But For How Long?

• Momentum indicators for commodities are turning up.
• The Dollar Index has violated a small down trend line.

The major averages have moved sideways over the last 12-months or so but under the surface a few sectors have managed to gain in price and some have lost considerable ground. Chart 1 highlights some of these differences with the S&P in red separating two winners, healthcare and consumer cyclicals from several sectors and industry groups that have lost ground, namely materials, mining, gold miners and energy. These resource areas have taken a real beating. After all, some are down more than 20% over the last 200-days and a couple are up around 20% in that same period. Selectivity has certainly been the order of the day here. I am not saying that the commodity bear market is over, because I don’t have any evidence of that, except for employing the reversion to the mean argument. What does appear to be in the cards though, is the potential for some kind of near-term commodity related rally.

Chart 2

To better appreciate the terrible performance of resource based stocks please refer to Chart 2. This one shows my inflation/deflation ratio. The inflation part consists of several industry groups that do well when commodity prices rise, such as energy and mining. The Deflation Index reflects defensive and interest sensitive equities, such as utilities, property casualty companies and so forth. I look upon this relationship as the stock market’s way of betting on inflation or deflation.  As you can see this ratio has recently sunk to a new all-time low as it has unequivocally been voting for deflation. Indeed, it has fallen so sharply that you have to wonder whether we have just seen the kind of capitulation that is often associated with a major bottom.

Chart 2

Chart 3 compares this relationship to commodity prices in the form of the CRB Composite. As you can see the two series are closely related the majority of the time. Both have fallen to serious new lows. A similar cross check relationship can be obtained from the ratio shown in Chart 4. This ratio between two ETFs uses the Goldman Sachs Natural Resource (IGE) and Spider Consumer Staples (XLP).  Both, of course show a strong under-performance by the resource sector.

Chart 3

Chart 4

Now however, we are seeing some preliminary signs that commodities and commodity-related equities may be forming some kind of a bottom.  In this respect Chart 5 shows that the MACD for the DB Commodity ETF (the DBC) has already started to turn up and the KST has definitely begun to flatten.  The price has also violated a sharp down trend line. That action ought to at least result in some kind of rally or trading range of sufficient magnitude that will enable the two momentum indicators to go bullish.

Chart 5

Chart 6 features my commodity net new high indicators. The one in the center panel monitors a basket of commodity prices that register net new highs over a 10-day period and that in the bottom window register net new highs over a 50-day time span.  Both series look as though they are in the process of reversing to the upside, which usually means that a short-term advance of some kind is underway.

Chart 6

Chart 7 shows a strong connection between the performance of the US Dollar Index and that for commodity prices. The blue lines represent the various up and down waves for both series. Remember the chart plot for the DBC is an inverse one in order to enable both series to move in the same general direction. That suggests that the joint downside trend line breaks for each series means a lower dollar and higher commodity prices.

Chart 7

Chart 8 shows that the KST for the Dollar Index has also started to roll over, thereby hinting that some form of correction is in the wind. Support for the Index lies in the 92-93 area.

Chart 8

Two currencies that have been trending lower because of weaker commodity prices are the Canadian and Australian dollars. The relationship between the Canadian and the DBC is shown in Chart 9 and that for the Australian in Chart 10.  Both currencies can be seen to have violated short-term down trendlines. Charts 11 and 12 also indicate that both currencies have experienced KST buy signals.

All of this evidence suggests that commodities are set for an advance of some kind. Whether it will turn out to be the beginning of a bull market is open to question. My speculation on that, and it really is speculation, since technical analysis does not help us in forecasting the character of a move, is that we have begun some kind of ranging action.  The character of that trading range may reveal whether the bear is still with us or whether a new bull, designed to fool the majority, is underway.

Chart 9

Chart 10

Chart 11

Chart 12

Good luck and good charting,
Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group or its affiliates.