Commodities Crumbling

For the third week in a row, the S&P500 lost ground. Last week, it slipped just under 0.9% on modestly higher volume. Volatility, as would be expected, also inched up a bit, but it remains firmly within complacent territory.

Yet, despite the slight retreat in prices over the last three weeks, the technical picture for the weekly charts has barely changed. Prices are still in an overall uptrend. They’re above the 200 day moving average and this all-important moving average is comfortably sloping upward.  On the daily charts, sure, prices seem like they’ve stalled a bit. But here too, there is still no sign of an imminent and dramatic price drop. While US stock markets remain extremely over-valued (eg. using the Shiller or CAPE price to earnings ratio), we may not see a material retreat in prices—or a correction—until some sort of catalyst triggers the retreat.

Last week’s economic releases continued to mostly disappoint. Job openings, retail sales (both headline and ex-autos), business inventories, small business confidence, and consumer sentiment all missed expectations. More dramatically, retail sales were a disaster and the miss in consumer sentiment was the greatest miss since 2006.

One of the big stories in markets outside of stocks and bonds is the commodities markets which continue not only to erode in price, but lately seem to have escalated their descent. The CRB index, which contains a basket of major commodities, is now dropping to levels last seen in 2008 when the index fell about 50%. Today, it has fallen by about 45%. But interestingly, it bag to slip back in 2011, when US stock markets were still far lower than they are today. And this erosion has escalated in velocity since mid 2014.

One of the key drivers of the drop in commodity prices is the collapse in the price of oil. After hitting post-financial crisis lows a couple of months ago in January, the price of crude bounced back a bit in February. But just now, the price has resumed its decline and just hit fresh six year lows. In other words, the price of oil is back to where it was in 2009.

The biggest takeaways from this collapse in commodity prices are these: 1. the global economy is really not recovering, despite what the mainstream media reports claim. Commodity prices always rise as economies recover; they always fall when economies stumble. 2. the stock market prices are completely diverging from commodity prices, when usually they are more in sync with each other. So the question is—did something change so that stock prices no longer follow commodity prices? Or is it simply a matter of timing—the two will converge in price; it simply hasn’t happened yet.

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