Wednesday, February 1, 2012

Commodities

In the current market environment we find ourselves certain inter market relationships consistently exist between asset classes.  Yesterday we looked at Treasuries and Gold and how they were defying the typical relationship they have with one another.  Today we are going to look at another such relationship.  This is the usually strong positive correlation between stocks and commodities.  In other words, as stocks move higher commodities usually will move in the same direction.

Many in the market are commenting how the price of oil is not tracking equities higher.  Well, here's a few charts showing the same reaction from industrial metals, coal and steel:





All these commodities started the year closely tracking stocks higher but all have stopped "on a dime" in the last 4 to 5 trading days and all at Fibonacci resistance levels.

So, we have stocks, Treasuries and gold moving higher while commodities are showing signs of weakness.  And the Dollar is also weakening. 

Which asset class is accurately predicting the future?   My thesis since the ECB LTRO of December 21st is that "the fix is in" so I'm going to say that stocks, the dollar and gold are right and commodities are merely consolidating before heading higher.  Treasuries are still reacting to the FED's announcement of last Wednesday as well as being helped by continual FED buying at the mid to long end of the yield curve (Operation Twist).