Commodity Collapse Continues

The S&P500 rallied last week by virtue of a “Greece is saved” story line. Was Greece really saved?  Not at all; in fact, it will be taking on another slug of debt to add to the mountain of debt that it’s already burdened with. So the S&P ended the week up about 2.4%. Volume was very light, so once again, this means there was no big in rush of new investors piling into stocks. Also, volatility dropped back, this time to new 2015 lows, which would not be surprising since stock prices almost returned to 2015 highs.

Technically, the oversold condition that we noted over the last two weeks has been corrected as anticipated. The S&P has bounced off the 200 day moving average and is now comfortably above the 50 day moving average. In fact, since it’s almost reached the upper Bollinger band on the daily charts, the index is close to being somewhat overbought. On the weekly charge, last week’s 2.4% advance is barely visible. What is still very clearly visible is the 7 month distribution pattern that began to form at the beginning of the year. Unless new highs on the S&P are achieved and sustained, this distribution pattern will remain in effect.

On Main Street, unlike what happened in US equity markets, there was no “bounce back”. Last week’s data was very weak. Retail sales kicked off the week on a very bad note. Instead of jumping 0.3% as expected, they actually FELL 0.3%. Something similar happened to retail sales excluding autos. Export prices also fell; they were supposed to rise. The Philly Fed survey missed badly. And Consumer sentiment recorded it’s biggest miss (to expectations) since 2006. On the positive side, The Empire State manufacturing survey beat expectations, but just barely. Industrial production also came in just slightly ahead of consensus estimates. All in all, once again, no boom is anywhere in sight for the vast majority of Americans living on Main Street, Americans who by and large do not own a lot, or any, stocks.

Finally, in a story that keeps growing, the commodity complex is witnessing its biggest collapse since early 2008. The Bloomberg Commodity Index has just crashed to 2002 lows, breaking below the low points reached in 2008.

Meanwhile, ironically, US stock prices are still near all-time highs.  How is this possible?  Well, in the long-term, it isn’t. Back in the late 90’s, commodities started crumbling 2-3 years before the stock market started to melt down in 2000.  And in 2008, commodities crashed about six months before the stock market collapsed. In both prior periods, stocks diverged substantially from commodities. And the same is happening again.

So it’s highly unlikely that this time will be different. Stock prices and commodity prices will very likely converge over the next year or so. The only question is—will commodity prices explode higher to catch up with stock prices? Or will stock prices melt down, to meet the already battered commodity prices.

And finally, since commodity prices have already melted down, and by doing so, have scared away huge swaths of investors from this asset class, any value investor will tell you that commodities are now creating attractive long-term buying opportunities. But is it time to jump in with both feet?  From a trading standpoint, no it’s not.  The knife is still falling and buying now may lead to lower prices and short-term paper losses. So just as in the stock markets, it pays to look at the 200 day moving average, and this indicator is still signally to wait to buy—-this moving average is sloping downward with the 50 day moving average solidly below it. A safer time to buy may be when the 200 day stops falling (ie. goes flat) and then starts to rise slightly. Of course this means that an investor will miss the “turn” up in prices, but it will make it less likely that the investor will suffer paper losses by getting in too soon.

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