Bourbon & Bayonets

Icon McAbby Reveals Steamy Investment Taboos! (CRB, DBC)

There’s a confusion occurring in the world of commodities these days, and we’re going to do our level best to set it aright.

It goes like this –

matty

There’s a belief in some quarters that the commodities are now at a turning point and that higher prices are ahead for most if not all commodity futures because 1) the dollar is losing its cache as the world’s reserve currency, 2) the BRIC countries are increasingly abandoning the buck in favor of trade in their own currencies and 3) that after three and a half years in a downward spiral, the bear market in commodities has simply wound to an end.

But is it so?

Let’s first have a look at the lon- term chart of that geriatric, equally-weighted CRB commodity index –

cci

As you can see, the CRB has broken through support to 4-year lows and won’t likely find a new brassiere until it arrives at the 450-mark, a full 10 percent below today’s price level.

Among the professional investment clique (and among most technicians, to be sure) this chart will be taken as an unequivocal sell signal, regardless of the fact that a number of other commodity indexes have arisen to challenge the CRB’s dominance over recent years.

In fact, let’s examine at least one more of them to reiterate the point, so that we don’t create skeptics among those who might believe we’re being tendentious in our research.

Here’s the Deutsche Bank PowerShares Commodity Index, whose tracking fund trades on the New York exchange under the ticker DBC –

dbc

Here, the picture is equally clear. A four-year pennant pattern (in red) was just resolved with a downside breakout exactly four weeks ago (in blue).

That’s bearish, friends.

RSI and MACD weekly indicators are also in accord – with both trending beneath their respective waterlines, the message is – that we’re in the midst of a new leg down for the commodity bear market, one that should carry at least to the $21 mark, the next lower retracement bottom for the stock, set back in the summer of 2010 (not seen on chart).

Precious Metals Lead

 

The truth is, we might also have predicted this from recent moves in the precious metals.

Inter-market technical analysis teaches that the relationship between the PMs and the broader class of commodities is that of leader and follower. It’s not a relationship that holds 100% of the time, to be sure, but it has proven itself often enough to be considered historically reliable.

And what’s it saying now?

Well, if we look at silver, we see a commodity that’s just broken below its former bear market lows, bringing it to a level not seen since the summer of 2010 (not pictured).

As for gold, we have a metal that’s floating a mere 2% above its bear market lows and could arrive there shortly, if ETF fund flows are any indication.

Take a look here –


etfshares

Retail investors have not seen fit to repurchase their gold ETF shares since they started selling them in earnest back at the end of 2012. And the SPDR Gold Trust (NYSE:GLD), the world’s largest exchange traded bullion fund, reports that last Friday’s 1% decline in its holdings to 776 tons, brings it down to levels not seen since 2008. Friday’s outflows were, in fact, the highest on record since December.

And that, too, is bearish.

So the precious metals are headed lower, and the commodities in general are headed lower, and where does that leave the world?

circling

Ladies and gentlemen, commodities are not sexy. Maybe they will be again in the future. Maybe gold will regain its luster among the investment set. Maybe it will happen sooner, maybe later. But for now, none of it is sexy. So it’s all going to continue to sink.

Bonds are not sexy either. And they, too, very shortly will sink.

Only stocks are sexy.

Sexy stocks, that is.

O.K., McAbby, enough! What’s the point here?

 

The point is Wall Street is in a bind. It owns a tremendous quantity of stock and it has to sell it to someone.

And that’s where you come in.

Take a look at the following –

sellers

According to research by JP Morgan, retail ownership of equities is paltry, but not for a lack of cash.

Main Street simply doesn’t trust the stock market.

But it will.

A gander at the above chart shows that outflows have already leveled off, and shortly, we believe, the retail investor will once again begin to buy stocks hand over fist.

It will buy from a Wall Street that dresses up the equity market in the most vulgar, pornographic manner, and it will not cease to buy until it has invested its very last dollar.

You ain’t seen nothing yet.

And you have no choice in the matter, either. If you want to maximize your returns in the coming inflationary typhoon, you also have to invest in equities.

Hate to be the one who reveals the naked truth.

But so it is.

Many happy returns,

Matt McAbby, Senior Analyst, Normandy Research

Join the discussion

  1. Doug Hax

    Sure, I love going along with the crowd and buying into equities. But what you’re saying basically is we’re about to enter the frothy bubble period. So how in the Heck are we going to know when / how to get out of it before the inevitable crash???
    Thanks for your always insightful and amusing columns!

  2. john ulysis

    I like your analysis but your crb chart is wrong. it’s way above the last swing point

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