Last May as the market topped out in its 10% decline to the June low, my weekly column pointed out how commodity prices tend to be quite accurate predictors not only of stock market direction, but to an uncanny degree the severity of market corrections. Plunging Commodity Prices Are Ominous For Stock Market! May 11, 2012
It may be time for an update.
In that article last May I noted that:
“Consumers understandably like to see prices for commodities decline, the more the merrier, particularly gasoline and energy costs.
Many analysts also take commodity price declines as a positive for the economy, on the theory that consumers will have more spending money in their pockets, and manufacturers will have lower costs, so hopefully greater earnings.
Investors tend to also take declining commodity prices as a positive for the stock market on the same reasoning.
Unfortunately, history doesn’t confirm the optimism.”
This is an updated chart from that article:
As it shows, the CRB Index of Commodity Prices plunged 57% in the 2008-2009 economic downturn, and the S&P 500 plunged 57% to the early 2009 bear market low.
In the summer of 2010 the CRB Index fell 15% as the economic recovery began to stumble. And the S&P 500 fell 15% in that summer’s market correction before the Fed came to the rescue with QE2.
In 2011 the CRB began declining in April and fell 19.5% by late summer. Sure enough the economic recovery stumbled again and the S&P 500 fell 21% to its low before the Fed came to the rescue again with ‘operations twist’.
My May article ended with the observation that the CRB Index had declined 10% from its high in February, and wondered if that was not a warning for the stock market.
And to update from that point, sure enough the S&P 500 declined 10% to its June low last year.
So should we be concerned that even as the stock market has been rallying impressively since November, the CRB index has not, and is now down 7% from its peak last fall?
To read my weekend newspaper column click here: Gold’s Correction Is Not Over!
Subscribers to Street Smart Report: In addition to the charts and analysis in the ‘premium section’ of this blog post, the new issue of the newsletter from Wednesday is in your secure area of the Street Smart Report website.
Images: Flickr (licence attribution)
About The Author
Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at www.SyHardingblog.com. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!