Barring a large selloff, or economic recession, the evidence suggests we are in the early stages of a new bull market for commodities. Over the past few years, nearly every major global commodity in the world has been in a severe bear market. Gold and Silver both topped out in late 2011 and were in a vicious downtrend/bear market until Q4 2015. Now, in mid-2016, Gold and Silver are two of the strongest performing asset classes of the year. Other commodities are also emerging from violent bear markets such as: Oil, Soybeans, Wheat, Corn, Sugar, Coffee, just to name a few.
Watch The Greenback:
The selling in the commodity complex intensified in late 2014 when the USD began to surge and a new bull market was born on the prospects of a hawkish Fed. The huge rally in the USD from July 2014-Mid 2015 added more bearish fuel to the commodity melt-down. During that time, fear of deflation dominated which favored an easy money stance from global central banks. Remember, commodity prices are priced in US dollars so, all things equal, a higher dollar tends to be bearish for commodities and a lower dollar tends to be bullish. Not always, but that normally is the case. The USD is now forming a large top and may be unwound now that the Fed has changed its stance and is not going to raise rates four times this year. In fact, until economic data improves, it might not raises rates at all in 2016 (but anything is possible). So the stronger dollar trade is being unwound and that is bullish for the commodity complex.
Early Stages of A New Bull Market Or Bull Trap In A Bear Market?
Over the past few months, the bullish tide resurfaced in Q4 2015- Q1 2016 when we saw a handful of commodities bottom and surge in price. Sugar, Gold, And Silver all bottomed in Q4 2015 and have soared in 2016. Then, crude oil, soybeans, and a slew of other commodities bottomed in early 2016 and have vaulted higher. Based on the recent action in the commodity arena it is becoming clear that commodities have bottomed and are now in the early stages of a new bull market. Since no one can accurately, and consistently, predict the future it is important to note that this could be one huge bull trap (retracement in a bear market) and lower prices may follow. After studying decades of market history, I don’t feel this is the case. Typically, bull traps tend to be short lived in both size (percent change) and scope (few weeks to a few months – or shorter in duration). This rally is now pushing six months and we have seen huge moves in a slew of commodities (Oil prices being the poster boy and have almost doubled in 3.5 months!). We are open to any outcome but until we see any meaningful selling ewmerge in this space – odds favor we are in the early stages of a new bull market for commodities.
Sellers Are Washed Out, Fundamentals Haven’t Changed:
Everyone loves talking about crude oil – so let’s take a closer look and analyze the huge move we have seen since the Feb 11th low. In Feb, crude plunged to $26.05/barrel which was the lowest level since 2003! Conventional wisdom told us that oil was in a free-fall because the fundamentals were bearish: supply remained very high and demand remained very low (tepid global growth). Then crude bottomed, started to rally on rumors that OPEC will “freeze” supply. Well, as we now know, OPEC did not freeze supply and oil didn’t sell-off. Instead, it rallied! You know what they say about a market that can’t fall on bearish news (it’s bullish!). So clearly that didn’t matter, then market sentiment shifted again as crude rallied and people thought OPEC may place an output ceiling. Again, nothing happened, and market participants didn’t care and sent crude surging all the way to $51/barrel (as of this writing). Literally, the fundamentals haven’t changed but crude surged 96% in 3.5 months! That, ladies and gentlemen, is very impressive and the fact that it continues to rally, even with bearish fundamentals, and all selling is short-lived, only strengthens the case that we are in a new bull market and not a bear market trap. Of course, we know anything is possible in markets and this could roll over and fail miserably at anytime. But until it does, we’ve learned to not fight the tape and stay in harmony with market trends. In the short term, many of these markets are terribly extended and way over due to pullback.