CRB - The Air is Set to Come out of the Commodities Balloon

The Commodity Research Bureau has published indices for as many as 70 years. They are some of the most watched indicators of global commodities markets. I review their spot and futures indices as part of my discipline at least once a week. Of late an interesting divergence has emerged in that the spot chart has been basing near its highs but the futures have experienced a sharp selloff.

The futures chart shows that commodities bottomed well before the general market, in October '01. Since that time this comprehensive index has paused occasionally to put in a constructive base, but it's always been followed by another leg up. Now, after nearly 5 years, we have clear signs of exhaustion.

Forget all the trite bullish sound bites you've heard (China, M&A activity in the sector, etc) in the mainstream media about why this time it's different (isn't it always different?). The chart is telling us it's over. The index is breaking down below its 200 SMA daily/40 MA weekly. It's pierced these MA's before but it's always snapped back quickly. The sole exception was during a basing period in 2003, and at that time the move below did not take out a prior pivot low. This time it has.

Just as tellingly, the long term uptrend line on a weekly log chart has been broken. I wanted to mention this when the trendline was first broken over 3 weeks ago, but when dealing with an uptrend of this gravity you want confirmation. And instead of bouncing back, over the last two weeks the index has plunged lower. In fact, the index might actually be oversold to the point where we are due for a bounce, so this is not an actionable trading call. It’s a warning of a change in trend. For the first time since the 2001 bottom we have a downtrend establishing itself on this chart.

Simply put, the law of supply and demand is making itself felt. All the years of low commodity prices led to underinvestment in the sector and resulted in little excess capacity. Once demand picked up insufficient production led to sustained record high prices. Now these five years of powerful pricing and seemingly endless demand have led to increased investment in the sector. The market is telling us that either demand will quell, supply is getting ready to swell, or a combination of the two. Either way, this sector is likely to be poor for your portfolio.

If you'd like to view a symptom of the disease in real time check out a daily chart of U S Global Investors (GROW), the mutual fund manager whose bread and butter is resource funds. Their stock vaulted as much as 43% the last five trading days because the outperformance of resource funds in general is leading a lot of "dumb" money into the sector, just as the curtain is ready to come down. You can't ask for any more classic sign of a top.

History is repeating itself. Tulip bulb, anyone?