Commodities Forecast to Pause in June, Up in July

By: Donald_W_Dony

KEY POINTS:
• CRB Index rests in June, but 450 remains the target by August
• Oil hits target of $134; supply concerns point to even higher numbers in late 2008
• Consolidation above $10.40 for natural gas; prices expected to reach $14 by year-end
• Commodity-sector rotation points to base metals as next to advance; late summer is expected breakout time
• Gold shares head into seasonal weakness

With oil recently reaching $134 per barrel, gold touching $1,000 in March, and many commodities extending their upward run for months, numerous readers have commented lately about how long this seemingly tireless advance can continue.

Long bull markets in raw-material prices are often viewed with continued disbelief by both professional and private investors, whereas extended rallies within the stock market are just expected. Recognizing when these long-term shifts in an asset class occur is key for high-performing portfolios.

More than six years – and counting

June marks the 78th month of the commodities bull market and the downward slide of the U.S. dollar. From historical data, we know that these secular trends continue for approximately 14 to 21 years. Commodities had an excellent upward run from mid-1960 to 1981, and the Dow Jones Industrial Average (DJIA) was flat for more than a decade. But, starting in the early 1980s, the reverse developed: commodity prices steadily weakened, as paper-based markets (S&P 500) enjoyed near-flawless advances for 19 years.

Although there are many triggers for these swings in asset-class performance, one of the big contributing factors is the U.S. dollar. Chart 1 graphically displays this. We can see the relative performance of the Commodity Research Bureau (CRB) Index divided by the S&P 500 (red line) bottom out in 2000 - 2001 as the U.S. dollar index (grey line) peaked in 2001 and early 2002. This movement tells investors that, during this phase of the commodity bull market, the dollar is playing a decisive role in determining the performance outcome for the two different asset classes. Right now, the falling U.S. greenback is helping drive up commodity prices.

Waiting for July
Last month, I stated that the CRB Index was consolidating within a bull market. This is exactly what’s happening. But because of the relentless pressure on oil prices (crude oil prices reached our target of $134 in May), the consolidation under the resistance level of 420 has been just marginally contained, which tells the story of what is likely to happen once July unfolds. In Chart 2 (on page 2), the technical models (lower portion) show that June will be another month of sideways trading. However, July suggests that the upward pressure is building again.

The first target should be about 450 in August, followed by 460 by year-end.

As long-time readers of this research newsletter will attest, I have been bullish on commodities for quite a while – in fact, since 2001. But the recent parabolic ramp-up in the CRB, from mid-2007 to present, does have me somewhat concerned. Markets never continue up at these...

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By Donald W. Dony, FCSI, MFTA
www.technicalspeculator.com

COPYRIGHT © 2008 Donald W. Dony
Donald W. Dony, FCSI, MFTA has been in the investment profession for over 20 years, first as a stock broker in the mid 1980's and then as the principal of D. W. Dony and Associates Inc., a financial consulting firm to present.  He is the editor and publisher of the Technical Speculator, a monthly international investment newsletter, which specializes in major world equity markets, currencies, bonds and interest rates as well as the precious metals markets.   

Donald is also an instructor for the Canadian Securities Institute (CSI). He is often called upon to design technical analysis training programs and to provide teaching to industry professionals on technical analysis at many of Canada's leading brokerage firms.  He is a respected specialist in the area of intermarket and cycle analysis and a frequent speaker at investment conferences.

Mr. Dony is a member of the Canadian Society of Technical Analysts (CSTA) and the International Federation of Technical Analysts (IFTA).

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