Sell In May And Go Away? Forget Stocks But How About Commodities?

• $CRB and oil break to the downside
• The stock market says commodities are headed lower
• Bond market participants leaning in a deflationary way
• Watch those commodity currencies

The usual “Sell in May and Go Away” articles are starting to appear bigly, and a case can indeed be made in that direction. I prefer to focus on the bull market, having learned many years ago the hard way that trying to time counter-cyclical price moves in the stock market is usually counter-productive. But I digress. Commodities have taken a small hit recently, so the point of this article is to see whether they may decline further by taking a look at some key intermarket relationships and inflation beneficiaries, to see if there is a common pattern i.e. should we sell commodities in May and go away?

$CRB and oil break to the downside

First, to commodities themselves. Chart 1 shows the broadly based CRB Composite ($CRB). It bottomed out at the beginning of 2016, rallied, and then formed a trading range from which it has since broken down. A test of that 2016 bottom looks like it will happen. If so, the Special K Indicator, which you can read about here, is likely to go bearish by violating the red trendline and its signal line. The price is already below its 200-day MA, which reinforces the significance of the breakdown.

Chart 1

Chart 2 shows that the oil price ($WTIC) has violated a key secondary up trendline and begun a series of declining short-term peaks and troughs. It too is in danger of a Special K breakdown.

Chart 2

The stock market says commodities are headed lower

Chart 3 displays two stock market relationships that reflect changes in the inflation/deflation balance.  The first is the Goldman Sachs Natural Resource/ Spider Consumer Staples (IGE/XLP) ratio. It reflects swings in investor sentiment through their preference between resource based and deflation sensitive equities. The Inflation/Deflation ratio (!PRDI:!PRII), in the bottom window, offers the same idea, but in a more broadly based calculation, that also includes gold shares. Right now, both are offering the same deflationary message. That’s because they have completed 1-year tops and look headed lower.  By comparing their trajectories with that of the DB Commodity ETF (DBC), you can appreciate how equity and commodity market traders are usually on the same page.

Chart 3

Bond market participants leaning in a deflationary way

Chart 4 shows that bond market participants also have their say by bidding up the price of bonds against commodities when they expect inflation, and vice versa. The technical position of this relationship has started to break down, with a marginal Special K and negative 200-day MA cross by the price itself. However, to be more confident in this view I would like to see a drop below 1.4, which would result in a violation of that 2016-17 up trendline. You can, follow this chart, and any others in this article, by clicking on it and saving it in a chart list for future use.

Chart 4

Bond market players also get two more votes in this technical inflation/deflation contest. The first is through the ratio between inflation protected (TIP) and regular bonds (TLT), as shown in Chart 5. A rising line indicates a preference for inflation protected bonds and vice versa. The ratio doesn’t follow the commodity market tick for tick by any means. However, at this juncture, it does appear to have broken down in sympathy with the DBC.

Chart 5

The second vote is an international one between the International Inflation Protected and World Ex US regular bond ETF’s (WIP/BWX). In this respect, Chart 6 shows that both the ratio itself and the Special K have broken up trendlines favoring deflation. It’s on a small knife edge at the dashed red line marking the bottom of a small potential distribution pattern.

Chart 6

Watch those commodity currencies

Two key currencies that are known for their sensitivity movements to commodity prices are the Canadian and Australian dollars. The Canadian Dollar ($CDW), Chart 7, looks very similar to the CRB Composite itself. That’s because both have broken down from a top.

Chart 7

On the other hand, its Australian counterpart ($XAD) has not yet broken to the downside, so the deflationary case is not a unanimous one. Indeed, if we find that the recent top completions and deflationary trendline violations turn out to be a whipsaw, then a break above the green trendline in Chart 8 for the Aussie dollar could well be a leading indicator. Why does such a possibility exist?

Chart 8

Well, Friday’s action (Chart 9) saw both currencies ($XAD and $CDW) experience outside days. These are bullish patterns for the short-term, say 5 to 10 sessions. That at least, should be good for a near-term bounce.

Chart 9

It’s also possible to point to Friday short-term reversals in West Texas oil ($WTIC) and the DBC (see Chart 10). That certainly adds some uncertainty to the picture, but right now I think the evidence narrowly favors the deflationary crowd. That could quickly change if the Canadian Dollar and Aussie Dollars manage a daily closing rally above 77c and 78c respectively and they are joined by a daily closing by the DBC above $16.25.

Chart 10

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 of Walnut Creek or its affiliates.