What’s Up With Commodity Stocks?
The recent sell down in the share prices has taken a toll on two main industries, one is shipping and the other is commodities. In this article, I present an insight into the technicals of commodity stocks by using the CRB (Commodity Research Bureau) Index as a reference. The CRB Index has a total of 19 commodities and has a 33% weightage on crude oil. The below chart compares the price on the S&P 500 with respect to the CRB Index (reference is 12 May 2009).
The chart starts in May 2009 where S&P 500 has just hit a bottom in early 2009 and is in the early phase of the recovery. As can be seen in the chart, the S&P 500 recovered at a faster pace as compared to the CRB Index. The CRB Index hit a resistance highlighted in the green Resistance arrow and turned down in what looks like an ABC correction. The CRB turned down earlier than the S&P 500 and this is a key point to note. The S&P 500 made a higher high but the CRB was flat. This created the first big gap between the two. The CRB also hit a bottom and recovered earlier than the S&P 500 which happened in May 2010.
What followed next was a stunning recovery of the CRB Index to close the gap with S&P 500. This move up looks like a strong Elliott Wave typical of waves three. On the way up, the CRB came down to test the support resistance line which had acted as a resistance earlier. The CRB hit a peak in May 2011 and it looks like it dropped off a cliff from there. The S&P 500 was also coming down but in a more orderly fashion at first and then followed by a sharp vertical drop. Both the S&P 500 and the CRB Index hit a bottom in Oct 2011 and recovered from there. Once again, it recovered from the same support resistance line.
The S&P 500 went on to record a higher high but the CRB Index has lagged and continued to hit and bounce off the same support resistance line. This has now created a huge gap with S&P 500. The question is whether will the CRB index recover and play catch up to S&P 500 or will it break the support resistance line and crash hard. It is hard to tell at this point in time. Commodities takes a beating during recession times and could it be that the CRB is pointing to a recession ahead? Or is it just coming off the highs as the Crude Oil gets back to a more reasonable level?
My view of the S&P 500 is that there might be one more leg up to go before the stock market turns down to complete Primary wave [C] or the stock market has already turned down. Either way, the upside is limited at this point in time and the downside risk is much higher. Based on this, it is highly likely that the CRB Index will break the support resistance line and further downside is anticipated for commodity based stocks. For the bullish case however, this view will change should further stimulus such as QE3 is announced.
Please share this article with your friends and colleagues.