More Evidence Of A Commodity Bear Market

• Commodities starting to generate some long-term sell signals
• Internals and commodity   intermarket relationships are deteriorating
• Energy has been lagging on the downside but may be ready to play catch up

Earlier in the summer I wrote a couple of articles on copper and oil suggesting some short-term vulnerability, but concluding that there was insufficient evidence to identify a primary bear market. That evidence is now starting to appear.

Commodities are starting to generate some long-term sell signals

Chart 1 compares the CRB Composite to its long-term KST and the long-term KST for the copper price. The solid vertical arrows show that peaks in copper momentum are typically associated with some kind of a top in the CRB Composite. Sometimes copper leads the CRB, and occasionally it lags. However, with the exception of the two dashed arrows, a peaking in the copper KST has not been a good omen for commodities in general. Recently, another copper momentum sell signal was generated and the CRB has broken below its 12-month MA. We have to be a bit careful on that one, because the chart is plotted on a month end basis and we have not reached the end of the month yet.

Chart 1

However, on Wednesday the $CRB Index decisively broke down from its 2018 head and shoulders top, which strongly suggests that it will remain below its 12-month MA until the last trading day of the month. Note that it is already well below its 200-day MA.

Chart 2

Internals and commodity intermarket relationships are deteriorating

Chart 3 compares the Invesco DB Commodity ETF, the DBC, with two stock market indicators that reflect  the battle between inflation and deflation sensitive assets. All three series are  generating a common message, which is that deflationary assets currently have the upper hand.  The first intermarket relationship is a ratio between the Goldman Sachs Natural Resource ETF, the IGE and a more defensive counterpart in the form of the SPDR Consumer Staples (XLP). This series has just broken below an important up trend line indicating that deflation beneficiaries, such as consumer staples, are likely to outperform natural resources, which tend do well when commodities rally. The bottom window contains my Inflation/deflation ratio, which attempts to break down the inflation/deflation battle from a different angle. Both indexes included in the ratio can be plotted on the StockCharts platform. The inflation/deflation relationship has also broken down in a more decisive way. That's because the Inflation Index (!PRII) is more heavily weighted towards mining stocks than the energy influenced IGE. No matter, both series track the DBC quite well and all three have started to break down.

Chart 3

Chart 4 compares the DBC to an indicator that monitors a basket of individual commodities generating new highs over a 10-day time span. As you can see, this series has gradually been getting weaker in the last few months. It has also been unable to generate an overbought reading since last March. Also, the June/August oversold readings were unable to generate much of a rally. Both are typical characteristics of a primary bear market. The Net New High ratio recently rolled over to the downside, which suggests further weakness lies ahead.

Chart 4

Chart 5 looks at the inflation/deflation relationship from the point of view of the commodity/bond ratio ($CRB/$USB). This series has also broken down in favor of bonds as it has violated both the trend line and 200-day MA. The Special K, in the second window, is still trading above its bull market trend line, but given the break in upside momentum indicated by the ratio itself, it seems likely that it will soon break the trend line.

Chart 5

Energy has been lagging on the downside but may be ready to play catch up

The Invesco DB Energy Fund, the DBE, looks like it may be in the process of completing a head and shoulders top. We must not jump the gun and call it a top until the breakdown actually takes place. It does seem likely though, because the daily KST in the bottom window, has already started to roll over to the downside.

Chart 6

Also, the longer-term perspective, shown in Chart 7, indicates that the DBE has already violated its bull market trend line and experienced an intermediate KST sell signal.

Chart 7

Good luck and good charting,
Martin Pring