Friday, August 23, 2013

Martin Pring: Commodity Prices Are About to Explode

I consider technical analysis a subset of the science of behavioral economics (Note: Behavioral Economics is not a subset of economics, it is its own science). That said, there is a lot of technical analysis that is nothing but voodoo analysis, the best stuff is the analysis that can be explained in terms of human behavior at its base. Martin Pring's technical work falls into this behavioral analysis category.

He writes today at Market Watch:
In June, I posted an article on MarketWatch entitled “Are commodity prices about to explode?” The question mark was there because a lot of ingredients were in place for a major rally, but I also pointed out that we really needed confirmation from some of the key averages.

Now I am going to remove the question mark, because two months later, a substantial number of indicators are crying "commodity bull market". Take a pinch of salt with the explode part of the headline because there are no known techniques for consistently forecasting the character of a forthcoming price move. I am not ruling it out, merely forecasting that in one way or another prices are likely to be substantially higher by year-end.

Commodity indexes are a disparate bunch, and some have already experienced tentative breakouts while others look set to. What's really interesting is that traders in other markets, which often anticipate commodity rallies, have already started to discount inflationary times ahead. If effect, they are telling commodities that it's time to get moving.

Chart 1 for instance, features the stock market in the form of a ratio between the Goldman Sachs Natural Resource ETF and the Spider Consumer Staples, the IGE IGE -0.15%   versus the XLP XLP +0.08%   .

When it's rising, this stock market relationship is forecasting commodity inflation. That's because traders are more enthusiastic about bidding up the price of the inflation-sensitive IGE than its defensive and deflationary counterpart the XLP. You can see from the chart how the ratio's movements correspond quite closely to those for the Dow Jones UBS Commodity ETN DJP +0.34%  .

What is clear though, is that the ratio violated a 2-year down trendline last Thursday. That suggests it's going higher. In effect, it's the stock market's way of forecasting higher commodity inflation. Moreover, this price action also signals a change in sector leadership in favor of earnings-driven areas such as energy. mines and basic industry over deflationary beneficiaries[...]

 Last week, [the popular Thompson Reuters CRB Composite] tentatively broke above a two-year (primary trend) down trendline and completed a small inverse head-and-shoulders base. Since the intermediate momentum is bullish, and by no means overstretched, I am expecting to see a more decisive move to the upside.
The Pring analysis falls in line with what I have been forecasting in the EPJ Daily Alert: stagflation. The slowing money supply is going to shrink the capital sector of the economy,while the money that has already been pumped in is reaching the consumer sector and will result in accelerating price inflation. It is going to be the worst of both worlds, a sluggish economy and rising prices.


  1. so like the 70s only with one direction instead of (insert favorite 70s musical beat ensemble)

  2. Can't wait to see what Reaganomics II will look like.