Commodities May Be Down, But Are They Out?
- Long-Term Commodity Technicals are Finely Balanced
- Gold Leads Commodities
- Commodities Rise and Fall with Confidence
- Short-Term Technicals are Encouraging
- Platinum Breaking Out
Commodities have been losing ground recently, but the latest data suggest that they may be in the process of turning around. If so, that could be important for those who believe that the economy will experience a soft landing and avoid recession. That's because commodities have two functions. Firstly, they are obviously are tradable entities. Secondly, and arguably more importantly, commodity price swings are influenced by the level of business activity and are, in a sense, also a market-to-market economic indicator. I can't say for a fact that commodities are in a bull market, as the evidence of long-term trend reversals is just not there at present. However, we can say that the long-term technicals are currently pretty balanced. That means that the next short-term rally could have the power to tip some of these negative long-term indicators into the bullish camp.
Long-Term Commodity Technicals are Finely Balanced
Chart 1 puts that primary trend situation into perspective, comparing the CRB Composite with my Inflation/Deflation Index. This relationship compares an index of inflation-sensitive stocks (!PRII) to one that monitors deflation-sensitive issues (!PRDI). It's the stock market's way of voting for an inflationary or deflationary outcome. Note that both series move in similar patterns. The dashed arrows show that, in many instances, the stock market, through the ratio, leads the commodity market. Since 2016, both series have been in a trading range, but are not showing the same bearish characteristics they experienced in, say, 2008 or 2014-15. Note that the KST for the ratio has almost gone flat and is very close to its MA. Both series are reasonably close to their dashed purple bear trend lines. In effect, it would not take much to reverse these trends from their current position of bear to a full-fledged bull market. On the other hand, we have to admit that these series are very close to major support, the violation of which would hint at a recession rather than a soft landing. Also, the ratio continues to edge lower. It doesn't have to lead commodities higher, but it would be a favorable factor if it did.
Chart 1
Gold Leads Commodities
One relationship that is offering some hope for commodity traders is that between gold and commodities. Using the benefit of hindsight, the green-shaded areas in Chart 2 flag the major rallies in the CRB Composite since 1970. The green arrows under the gold price indicate that, in the vast majority of instances, the gold price leads commodities. Since 2015, the CRB Composite has essentially gone flat, as the 2015 low is only slightly under recent prices. In the meantime, the upward-sloping green arrow tells us that the gold price has been moving higher. If the leading role of the yellow metal is to be repeated, that should mean that commodities are headed higher.
Chart 2
Commodities Rise and Fall with Confidence
Bond spreads are a great way to observe swings in confidence that affect the economy, bond yields, stock prices and commodities. Chart 3 compares the CRB Composite to a ratio between the iBoxx High Yield and iShares 7-10-year Government ETFs (_HYG/_IEF). The arrows flag the ups and downs of both series. Recently, the ratio dropped below the red line, which is the neckline of a bearish head-and-shoulders. That's not very positive for commodities, as long as it remains below that line. For instance, it would be much more encouraging if both series rallied above their respective green dashed down trend lines. Incidentally, you can follow this relationship simply by clicking on the chart as more data is reported.
Chart 3
Short-Term Technicals are Encouraging
Chart 4 compares the Bloomberg Commodity ETN (DJP) to my commodity net new high indicators. One monitors a universe of commodities registering net new highs over a 10-day span, while the other makes the same calculation using 50 days. Both are in a rising trend and neither is overextended. That suggests that the DJP is headed higher. The key will be to see whether it can move above the green trend line, which is just a tad under $22.25.
Chart 4
Chart 5 features the DB Commodity ETF, together with a short- and intermediate-term KST. The short-term series looks as though it has bottomed, whereas its intermediate counterpart has gone flat. What's really needed is a spark from the price itself, with a Friday close break above the green downtrend line and 65-week EMA at $15.75.
Chart 5
The highest weighting in most commodity indexes goes to Energy. Chart 6 shows that the DB Energy Fund (DBE) is caught between two important trend lines. It looks to me as though the break will come on the upside, as the short-term KST has started to hook up. It also seems likely to form a bullish outside week, since last week's trading totally encompassed that of several previous weeks. The price also closed very near its high for the week, which is an additional plus.
Chart 6
Platinum Breaking Out
Chart 7 features the platinum price together with its long-term KST. The arrows show that when the KST has bottomed, a worthwhile rally follows most of the time. The failed signals are represented with dashed arrows. Note that they all developed under the context of a primary bear market. We do not know for sure whether the price is still in a bear trend; however, that seems unlikely, since the price has rallied decisively above a multi-year downtrend line, following a positive divergence with the KST. The divergence has been flagged by the orange dashed arrows. Also, the price is decisively above its 12-month MA, which was not the case with two of the three false signals. Go platinum go!!
Chart 7
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 Groupof Walnut Creek or its affiliates.
