Commodity Insite

In the final four sessions of January and first session of February, the Dow Jones Industrial Average lost 1095 points, the worst weekly slide since Oct. 10, 2008. Bond prices during that period fell four full points with futures ending at levels not seen since March 2015. Yields on the widely followed 10-year Treasuries surged to 2.85 percent, the highest in four years. A historically rough week by any measure.

The first month of 2018 was simply bearish. So bearish in fact, investors and traders were quick to recall the old, saw, “As January goes, so goes the rest of the year.” And it is not unusual for any market, including stocks and bonds that do poorly all week and especially on a Friday, to run into trouble at the start of a new week.

The weakness with stocks and the Dow last week was so unsettling that Merrill Lynch, one of the most respected of all financial brokerage houses came out with the following prediction according to CNBC News: “The frantic dash into stocks has hit a boiling point, causing a reliable indicator from Bank of America Merrill Lynch to flash a sell signal Friday.”

The CNBC article went to state, “The firm's strategists say overheated bullishness tripped its 'sell' indicator Tuesday, in the early stages of what has been a rough week.” And, “This is the 12th time that the 'Bull & Bear' indicator has indicated a 'sell' position dating to 2002, and each time has been accurate, the firm said in a note last week. The average peak-to-trough return is a drop of 12 percent.” And based on the Merrill, “sell” signal it suggested a minimum downside target for the Dow of 23,000.

But another equally interesting article hit the news wires at virtually the same time. The article was from Market Watch with a headline blaring, “Goldman touts best commodity investing environment in a decade.” The first paragraph read as follows. “Goldman Sachs on Thursday touted its bullish overweight call on commodities, declaring the investment environment for the market as the best in a decade.”

Thus, at the end of last week and on a Friday, no less, one of the largest and most influential brokerage firms in the world flashed a sell signal for stocks that has never been wrong, while another influential brokerage house that is near legendary, proclaimed the best trading environment for commodities in 10 years has arrived.

With those thoughts in mind, remember back to my column from last week entitled, “The Chickens Are Coming Home To Roost.” The final paragraph of that column read as such: “Stocks tripled since 2009. Bonds have been moving higher since August, 1982, 36 years ago. History shows that markets of all kinds are two-sided. They don’t always go up. Nor, do they always go down. And the developments this week with both stock and bonds is basically what I hinted about in my first two columns of 2018. And what I hinted about was this old saw, “The chickens are coming home to roost” for stocks and bonds.”

It is true, as I stated above, that, “the final four sessions of January and first session of February, the Dow Jones Industrial Average lost 1,095 points, the worst weekly slide since October 10, 2008. However, this week was just as bearish with the Dow dropping 1,597 points on Monday and 1,032 points on Thursday. The Monday decline was the largest single day drop for the blue chip index point-wise in history. And the highlight of the week was the two white-knuckle declines of more than 1,000 points each just days apart.

It is interesting to note that the Dow punched out a low of 23,081 on Wednesday before catching a bid and staging a rally. And the low posted was within 81 points of the Merrill Lynch downside objective made last week. Still, the question moving forward simple. Have stocks bottomed and now are poised to recover? They could indeed, but my work shows the hemorrhaging with stocks will not end until the Dow touches 22,000 at the least.

Think serious about this if you doubt the Dow can fall to 22,000 or lower: Over the past five sessions, in a 2,000-point trading range, the Dow, going up and down, north and south, has traded about 20,000 points. In a week, the Dow has moved almost as much as it is worth. Never before in history has such a wild and crazy scenario been seen.

The spread difference between stocks and commodities is at its widest level in 50 years. Moving forward, the gap will narrow considerably in favor of commodities. Bank on that.