Meet The Bull Market In Commodities


June 7, 2016, 5:00pm EST

Yesterday we talked about the bullish technical breakout shaping up in stocks.  Today we want to talk about a very quiet bull market going on that supports the story for stocks.  It’s commodities.

Within the course of the past four short months, commodities have gone being the leading threat for global stocks, to being a leading indicator of an emerging bull cycle for stocks.

Oil, of course, was the key culprit earlier in the year.  At $26 oil the world was a scary place.  The dominoes were lining up for widespread bankruptcies, starting in the energy complex and spreading to financials, sovereigns, etc.

If you recall, back in early February we said in our daily notes, “OPEC is not just in a price war with U.S. shale producers, but it’s playing a game of chicken with the global economy.  We’ve had plenty of events over the past seven years that have shaken confidence and have given markets a shakeup – European sovereign debt, Greece potentially leaving the euro, among them.  In Europe, we clearly saw the solution.  It was intervention.  Oil prices are creating every bit as big a threat as Europe was, we expect intervention to be the solution this time as well.

Indeed, central banks stepped in and removed the risk with a slew of intervention tactics ranging from more QE from Europe, currency intervention from Japan, relaxing reserve requirements in China, to the Fed removing the prospects of two (of what was projected to be four) rate hikes this year.

That was the dead bottom in oil (which started with BOJ action in USDJPY). And it kicked broader commodities into gear, many of which had already bottomed weeks prior.  No surprise, commodity stocks have been among the best performing stocks in the world for the past four months.

Now we have oil closing above $50 today, for the first time since July of last year.  And remember, two of the best oil traders of all time have been calling for oil to trade between $80 and $100 by next year (both Pierre Andurand and Andy Hall).

We looked at this chart in our April 12th piece and said: “technically, oil looks like a technical breakout is here.  In the above chart, you can see oil breaking above the high of March 22 (which was $41.90). In fact, we get a close above that level — technically bullish. And we also now have a technically bullish pattern (an impulsive C–wave of an Elliott Wave structure) that projects a move to $51.50, which happens to be right about where this big trendline comes in.”

Source: Reuters, Billionaire’s Portfolio

Here’s that same chart today…

Source: Reuters, Billionaire’s Portfolio

You can see we’ve not only hit this trendline and gotten very close to that projection from April, but (not as easy to see in this chart) we have a clear break of this downtrend now.  That line now comes in at $49.39.  Oil last traded $50.49.

Next is a look at broader commodities.  But first, we want to revisit the clues we were getting from commodities back in early March.  Here’s what we said in our March 3rd note: “There are other very compelling signs that the global economy is not only backing away from the edge but maybe turning the corner.

It’s all being led by metals prices. Copper is often an early indicator of economic cycles. People love to say copper has ‘has a Ph.D. in economics’ because it tends to top early at economic peaks and bottom early at economic troughs. Copper bottomed on January 15 and is up 13% since.

The value of iron ore, another key industrial metal, has been destroyed in the past five years – down 80%. That metal bottomed quietly in December and is up 32% since.”

Here’s the chart of broader commodities now…

Source: Reuters, Billionaire’s Portfolio

The Goldman Sachs commodity index is now up 44% from the bottom, though it’s heavily weighted energy.  The more diversified CRB index is up 24%.  Both would fall into the bull market category for those that like to define bull and bear markets.  But bottom line, when you look at the above chart you can see how deeply depressed commodities have been.  The trend is broken, and the model signals for big trend followers are flashing all over the place to be long.  And as we said yesterday, in early stages of cyclical bull trends in stocks, energy does the best by far. With that, although the energy sector weathered a life threatening storm, the upside remains very big for the survivors.

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