Commodities have taken it on the chin lately, with the CRB Index (a measure of most of the major commodities) falling more than 6 percent in a week. Gold is down 7 percent. Even copper, a market that seemed to forget how to go down, is taking a hit. Let’s find out what it all means.
A few weeks ago, I wrote that I was selling my energy stocks because they had become extremely overbought. I was not turning bearish on the group, simply going from bullish to neutral with an inclination toward buying them back in a few weeks or months.
Oil stocks cracked first, then other commodity-related areas started to fall. I feel the same way about the rest of them as I do about oil. The sector needs a break. It is getting it, but the pullback doesn’t change the long-term bull market outlook for the group.
I received a call the other day from someone who apparently lost a lot of money in commodity-related stocks recently. He wanted to know why the stocks were falling, given high demand in China and elsewhere.
It is still true that Asian demand will remain almost inconceivably high for many years, but the guy on the other end of my phone is not the only person who knows that.
Commodities have been moving up steadily over the last three years because of foreign demand. Investors have slowly picked up on this and have been acting accordingly. As prices moved up, the markets became more susceptible to corrections. That’s perfectly normal.
The real question I always focus on, though, is what happens next. I don’t think oil is done going down. It looks as if it needs a few months instead of a few weeks. Talk needs to increase about oil going back down to $40 a barrel. And the stocks are reflecting that.
Take Schlumberger, for example. The stock is still 30 points above its 200-day moving average. The sell-off could take it all the way down to that average without doing much damage to the three-year uptrend. And over the past three years, the stock has liked to get ahead of itself, then fall back to that long-term line.
Gold is the second-most-talked-about commodity in my sphere behind oil. It’s also been selling off lately, and it also looks as if it needs more time. There are a lot of gold bugs who have been celebrating the metal breaking out to 20-year highs, and I share some of their views on why gold should keep moving up.
But I don’t put gold on a pedestal and separate it from the other metals. Gold, like many other commodities, is in a longterm bull market and it has a lot more potential over the next five years. The same goes for most of the commodities. Yet like any market, commodities will go through periods of correction.
As for the rest of the stock market, sellers are getting more aggressive. The Dow Jones industrial average is performing better as the smaller stocks get whacked. This is not a positive for the market. The Dow is only doing better for the short term. Significantly growing weakness looms under the surface. As I have been saying for some time, be careful.
Hauke is the CEO of Samex Capital Advisors, a locally based money manager. Views expressed here are the writer’s. Hauke can be reached at 566-2162 or at email@example.com.