Saturday, April 12, 2008

Is the commodity bull finished?

I've been told in no uncertain terms recently and over the last 3-4 years that commodities have topped out every time we get a correction. That commodities are in a bubble. That commodities will now enter a long term bear market. Etc. etc. etc.

Let's take a look at commodities shall we?

In the first chart we see that the CRB has now completed a 1-2-3 reversal. We also see the commodity index that is 2.8% below all time highs. Can someone tell me how this implies that the commodity bull market is finished? I'm not saying the correction can't continue. I just don't see how anyone can infer at this time that the commodity bull market is finished.

Now lets look at the second chart. We see the fifth year correction in 06 which is typical of secular bull markets. We also see a recovery and breakout to new highs. Note the size of the consolidation. I've pointed out before the correlation between the the size of the consolidation and the length and magnitude of the following rally. So far this rally is rather small considering the size of the consolidation. This would suggest that this rally isn't done yet.

Now let's address the bubble sentiment. Again let me remind everyone that you just don't get a bubble until two things happen. First off the general public has to embrace the asset hook line and sinker. We saw this public participation in both the tech bubble and the real estate bubble. Thus they qualified as a bubble. We are not seeing any public participation in the commodity sector yet to any significant degree. The other condition for a bubble is massive oversupply. Again we saw oversupply in both the tech bubble with incredible numbers of nonprofitable companies going public on the hype of how many eyeballs they were attracting to their web sites and in the real estate bubble with massive overbuilding most of which was bought by speculators. Now that the speculators are now longer buying we see many many months of supply in the real estate sector.

We have no oversupply in the commodity sector yet. The world is currently struggling to meet demand even as it enters a recession. As a matter of fact we probably need a world wide recession for the oil markets to just barely keep up with demand.

Even though we've been in a secular bear market since 2000 there are still 40,000 funds that one can choose from to invest in stocks and bonds. Anyone want to take a guess how many natural resource funds are available now that commodities are supposedly in a bubble?

Less than 500.