Is the Commodity Market Breaking Out of its 9 Year Downward Trend?

A Picture is Worth a Thousand Words

Our brains are designed to think visually. But over the past 100 years we’ve been taught that the visual parts of our brain are not needed. Everything is focused on letters, words, sentences and paragraphs.

You want a good job? You better score high on your SATs…

And yet images are key to how our brains work. This is where the phrase “a picture is worth a thousand words” comes into play. And at times a picture can be worth a lot more than that. One of the main problems with this, however, is not knowing what pictures to look at.

The Commodity Picture


What I want to do this week is show you pictures of the Commodity Market because I believe it may have bottomed and is possibly in the first of nine innings.  And I understand this is dangerous for me to say because, after all no one can predict the future of any market. But bare with me a minute as we go through the pictures.

Let’s talk about the Commodity Market because it’s been a horrible place to have your money for the last 9 years. But it looks like things may be changing.  

Oil

In this first chart, you’re looking at West Texas Intermediate Oil. Keep in mind that energy is 40% of the Commodities index. With this in mind we can use oil as a placeholder that makes up most of the Energy sector of the Commodity index.

As you can see as you look at the chart, Oil is trying to figure out what to do. Basically it’s been going sideways for the last 2.5 years. And what’s most important here, is that it looks clear that oil bottomed in February of 2016 at about $27 a barrel. We’ll come back to this date in a bit.  

Copper

The next chart you see below is copper. I’m using copper as a placeholder for all industrial metals (13% of the commodity index) because copper is one of the most important industrial metals and commodities on the planet. In fact copper goes into almost everything we make so it can be a good barometer of how well world growth is.

Copper is going higher, and that means inflation has a better chance of moving higher too. And as you can see in the chart below, it’s just recently that copper has been moving up. After five years of falling, copper bottomed in January 2016. Again, we’ll come back to that bottoming date in a bit.

Gold

In the chart below, gold is representing precious metals, which represents 7% of the Commodities index. Gold itself looks to have bottomed in December 2015. I say “looks to have bottomed” because as your brain can see, gold is looking for a direction. If gold did bottom in December of 2015 then we have yet another important date to plot in a bit.

Agriculture

Lastly you can see the agriculture portion of the commodities index below. Ag is huge. Like Oil, it represents 40% of the Commodity Index. Of course agriculture is split between softs (coffee,sugar, cocoa, etc.) and grains (corn, wheat, soy, etc.).

This huge part of the Commodity complex may have only just bottomed six weeks ago in June. We need to watch this. And this is important because Commodities are rarely talked about as a core asset class, in fact commodities are one of the four main asset classes on the planet. And they’ve been out of favor for six plus years.

Commodities

The below Commodities chart has four green arrows at the bottom. Precious metal bottomed in December of 2015. Industrial metals bottomed in January of 2016. And Energy bottomed in February of 2016. So we have 60% of the commodities complex bottoming within 60 days of each other and still the commodities complex is still struggling.

Enter Agriculture, the 40% missing piece. The fourth arrow(on the far right)  is where Ag might have just bottomed. If you look at where the price of Commodities is today, you can see that Commodities is going for a breakout to the upside.

We’ll have to wait and see, but if Commodities is in fact breaking out, that could mean inflation is coming back and our fourth asset class is waking up after six years asleep.

Commodities vs. S&P500

Of course looking at Commodity charts by themselves doesn’t tell you the whole story because remember commodities is only one of the four asset classes. If you look at the chart below you’ll see the Commodity index ($CRB)  being compared to the S&P500 Index.

Since mid 2011 Commodities have clearly been underperforming the Stock Market. It’s  not enough for Commodities to be breaking out into an upward trend. They also have to be beating Stocks and Fixed Income to be worth a look. The chart below shows you how Commodities are doing compared to the S&P500.

Before we can get serious about this asset class they have to also be beating the S&P 500. And they aren’t [yet].

Look First

So while the Commodity index may start to look attractive to some, when you take a look at the big picture, right now it still makes sense to be allocated in stocks. It’s important to always look first. See what is going on and don’t just read or listen.

You need to look at the price charts. Both absolute and relative ones. This is what protects you and your investments. We are told to be diversified across 15 different stocks and sectors and then rebalance once a year. This approach worked in the 1970s. But it didn’t work in the Dot Com Crash or the Financial Crisis of 2008 or the 2011 debt ceiling debacle. And it’s unlikely that it will help when the next Market Correction or Recession happens.

We are 97 months in an economic expansion. The three longest expansions on record for the US are 120 months, 100 months and the one we are in right now. So we could see another 24 months of growth before a recession. As scary as that sounds to people who already have “investment vertigo” this what we may have in front of us. Unfortunately, when we do go into recession, the market has a very long history of falling on average 35%.

Will the Next Crash be Average?

We don’t know. But what we do know is the last recession took the market down 58% and the one before that took the market down 49%. And that was with the FED dropping rate five percentage points.If a recession happened today and the FED drops rates five percentage points, that would give us a Federal Funds rate of negative 3.75%. Can you say negative yielding 30-year US treasuries?

The wild ride isn’t over yet…not by a long shot.  But here’s the good news. There are only four places on the planet to put your money. And if you sit at the crossroads of the flow of that money, then you are able to see the early warning signs of market falls.

In Your Corner,

RCPeck-Dig Signature.JPG     
RC Peck, CFP

 

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