Sy Harding: Commodities seem to be following the same pattern as global stock markets. That makes sense since the stock market is concerned about slowing global economies, and slowing economies obviously mean less demand for raw materials used to produce and ship products.
It can be seen in the way the CRB Index of Commodity Prices is in a pattern similar to that of the S&P 500.
Both seem to have topped out May 1st and rallied back in a failed rally attempt.
It also shows up clearly in the price of crude oil (NYSE:USO), an important commodity that affects so many consumer and business products and costs, from gasoline and energy to the production of plastic and the cost of food production.
Since also topping out May 1st, crude oil plunged and then struggled around $100 a barrel. On it’s last rally back to $100 Wall Street claimed its correction was over and it was headed for $130.
It looks more like its next area of potential support is around its late June low of $90.
But the way, the fact that the stock market has broken below its June low does not encourage the thought that oil will find support there.
However, once again, both the S&P 500 (NYSE:SPY) and the price of oil have become short-term oversold beneath their 50-day moving averages.
Does that mean another short-term bounce in oil, commodities, and the stock market are due?
If so, will the catalyst be a hint or promise of QE3 from the Fed in its announcement after its FOMC meeting next Tuesday?
And if that happens, will such a rally attempt also be another failed rally to a lower high, another opportunity to sell into a rally attempt for those who are still holding and hoping?
Here’s a clue.
The volatility has been brutal. In the ‘old days’ volatility when a market was topping out was considered to be a particular negative, known as ‘upper level churning’, when ‘buy the dippers’ surged into the market on each pullback and spiked the market up, only to have sellers rush in and halt the rally at a lower high. Eventually traders stopped jumping in so quickly to buy the dips creating still lower lows.
We can know one group that is apparently selling into any strength. And that is corporate insiders. Recent reports have been that corporate insiders are selling their company’s stock at the heaviest pace since insider data began to be collected 40 years ago.
That’s also not a good sign.
Insiders have a history of acting early on their expectations of a trend reversal, selling while the market is still rising to its final top, and beginning to buy in the final stages of a correction when prices are still falling. That they are still selling, not buying, is a sign that they do not believe a bottom is near.
Will The Fed Jump In With QE3?
The Fed made it more than clear over the past couple of months that it has no intention of interfering again unless the economy again weakens so much that it is threatening to fall into a recession.
The Fed also said it doesn’t expect that to happen, that the first-half ‘soft spot’ in the economy was temporary and should reverse to significant growth in the 2nd half.
But that is clearly not happening.
That raises a number of questions that have no answers right now.
How soon will the Fed panic as they did last year, and decide they need to do something?
Given the Congressional pressure to cut government spending, will the Fed have leeway to provide much stimulus this time around if they want to do so?
Will they therefore be limited to trying to talk the talk with bullish forecasts, opinions, and promises, while not being able to try again to walk the walk?
And given the total failure of QE2 to re-stimulate the economy, what can they really do? After all, QE2 began last November, and we now know that GDP growth slowed in the 4th quarter of last year, and plunged dramatically in the 1st and 2nd quarters of this year, all taking place while QE2 efforts were in full force.
If they do act, will the stock market be fooled again into believing in the power of the Fed to control economies and markets?
Those questions will be particularly pertinent if the Fed hints at or promises a new round of stimulus (QE3) in some form in its announcement after its FOMC meeting next Tuesday, as I expect it will, and if the market’s initial response is positive.
It’s Always Uncomfortable to Make Profits In Market Declines.
I’ve commented often over the last 24 years how it’s not as much fun to make profits from the downside as from the upside.
When you make profits in rising markets everyone else is too. So everyone is happy to talk about it.
But when you make profits from a declining market when most everyone else is losing money and increasingly worried, it’s not as much fun, and you pretty much can’t talk about it.
And our subscribers are reaching that point.
With the market having just about given back all its previous gains for 2011 and the background reports still worsening, all of our holdings since our May 8 sell signal except one are up. And the one that’s down is down only 2% and we’re confident it will also soon begin to pay off.
Meanwhile for example, our downside position against the Russell 2000, including briefly taking a small quick profit in late June and then getting back in, is now more than 11%. Profits on our bond positions so far are more than 12%.
Speaking of market declines though, the DJ Transportation Avg. must be a particular disappointment to those who were attracted by its apparent ability to hold up so well.
It even rallied to a higher high in the July rally while the rally for the rest of the market failed at another lower high.
But it has made up for it by plunging 12% over the last 18 days, giving back all of its previous gains for 2011 and more, now down 3.2% for the year.
Sy Harding is editor of the Street Smart Report, and the free market blog, www.streetsmartpost.com. The Street Smart Report Online includes research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s. It provides two model portfolios as guides. One is based on our Seasonal Timing Strategy, one on our Market-Timing Strategy.