Posted on July 9, 2006
Filed Under Uncategorized |
I’ve been on vacation for the past month or so. Just as I was leaving, most of the commodities markets that had been in tremendous bull markets were just starting their corrections. The declines were steep, but thus far the recoveries have also been robust. We are now at an interesting inflection point, as shown in the series of charts below:
August Gold (above) fell 25% from its high, and has since recovered about 50% of its decline.
Copper (above) also corrected about 25% from its high, then recovered almost 70% of its decline.
Same story for Sugar (above) , which is seeing its demand is being driven by its use in the production of ethanol.
The oddball here has been oil (above) , which didn’t fall as much, but also regained almost all of its decline. Almost, but not quite. It now appears to be falling away from these highs.
Finally, we see the CRB Commodities Index (above) . Its pattern is typical. While the 62% retracement level is a common failure point for countertrend rallies, it is also common for a true advance to simply pause at this level.
The exciting question we are faced with now is: Was the May-June decline in commodities just a healthy correction? Or was it the start of something bigger? And in the larger scheme of things, what are the implications?
Note that while commodities were falling from the middle of May until the middle of June, the US Dollar had a generally positive, if not choppy, uptrend:
Nearly everyone and his brother is expecting the dollar to plummet, and commodities (naturally) to resume their ascent. Everyone, that is, except Prechter, who writes in the June issue of his Elliott Wave Theorist:
A prominent deflationist throws in the towel. Another looks for “good deflation.” Bears on commodities expect the economy and stock market to boom. Bears on the stock market and the economy expect gold and silver to soar. A flood of articles insists that the stock market is being “spooked by inflation” even as silver crashes 30 percent, gold 20 percent and copper 25 percent. The Fed agrees and vows to “fight inflation” with higher interest rates…
…For a long time there have been signs of an impending deflation. Now there are signs that deflation has arrived. Japan is leading the way. Its monetary base has fallen dramatically since the beginning of the year (15 percent in the past two months according to USA Today). Stock markets around the world have suddenly fallen 10 to 50 percent. Commodities that were soaring have reversed violently. Real estate is now in a “buyers’ market,” when there are buyers. The investment binges of the past three years are not the story; they are the precursor to the story…
In 2004, Pete Kendall and I wrote an article for Barron’s in which we argued that all investment markets had begun moving together, not contra-cyclically as they had in the past. We theorized that late in the credit and economic cycle, liquidity is the motor of all investment markets. We showed a graph of the major markets, including stocks, junk bonds and precious metals, and called them “all the same market.” Of course, two years ago people thought that our claim was crazy because markets would have to be crazy to move all together. But markets are crazy, and predicting such events requires understanding that markets are impulsive and patterned, not rational, and that they go through similar expressions of the same cycle of psychology over and over. The extent and duration vary, but the essence is always the same.
The flip side of markets going up together is that when the reversal comes they all go down together. We have been predicting this event for way too long, but it finally seems to be upon us. The wild speculation supported by the expanding, inverted pyramid of credit is exhausted…
So there’s Prechter, bearish as ever. I’ll be going over his deflation argument, as I understand it, for the rest of this week, in concert with his own writings which will be made available by Elliott Wave International from Wednesday July 12, at 5 p.m. EST to Wednesday, July 19, at 5 p.m. EST. You can get access to all of Elliott Wave International’s US Market reports free for one week. No charge, no obligation, no credit card required.
In my experience, EWI offers these “Free Week” peeks when they think something big is brewing in the market. What is that “something big?” Here is a hint: The title of the June 16 Elliott Wave Theorist quoted above (which you’ll be able to read in it’s entirety between 7/12 and 7/19) is “We appear to be the only advocates of a deflation-depression scenario.” Deflation means falling asset prices and a rising dollar – something no one (except EWI) is expecting.
Now, nobody has a monopoly on opinions, so I’d like to hear yours: On the direction of the stock market, commodities and dollar over the remainder of the year. No need to sign in to post your comments below.
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Doing my best to keep you informed,
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