The Commodity Research Bureau (CRB) Index acts as a representative indicator of today's global commodity markets. It measures the aggregated price direction of various commodity sectors. The index comprises a basket of 19 commodities, with 39% allocated to energy contracts, 41% to agriculture, 7% to precious metals, and 13% to industrial metals. The CRB is designed to isolate and reveal the directional movement of prices in overall commodity trades. The CRB is to commodities what the Dow Jones index is to stocks.
This is a weekly chart of the CRB index. The previous commodity bull market was capped by $150 crude oil back in 2008 which brought on the great recession. Commodities have been in a bear market ever since. Notice how the 200 Week Moving Average has been turned lower. I do believe however that all this changed when the commodities markets bottomed back in April. I think we are in the early stage of a new commodity bull market.
It is plain to see that since April the CRB has soared much higher. In many ways it had no where to go but up. Remember how crude oil was below $0 for a day or two? Since then, not only have we seen energy prices come back, but we have also seen agricultural commodities and lumber make some pretty ridiculous moves. These moves will soon turn the 200 day moving average back up and usher in a new bull market which should last several years. The chart below is the daily chart zoomed into this past year.
The stock market has been on a bull run since 2009. As commodity prices turn higher, the increased costs will soon begin encroaching on company earnings. This process is happening now and it will ultimately hurt stock prices. Commodity bull markets usually happen at the expense of stocks as liquidity flows from one asset class to another.
I believe we are beginning this transition period from stocks to commodities again. Those of you who are old enough to remember what happened to the NASDAQ back in 1999 - 2000 will remember that tech stocks soared into a bubble that was fueled by internet stocks. They called it the Dot Com bubble as stocks rose to ridiculous heights despite virtually no earnings.
The bubble was fueled by a speculative frenzy of people who wanted to get rich quick and were pouring every dime they had into companies with no earnings. Today's bubble is being fueled by trillions of dollars of stimulus that was literally printed out of thin air.
The following chart shows what the stock market did over a 3 year period. The bubble began with a sling shot move out of a low like we had in March of this year. The market consolidated a while just as the market today has for the past 3 months. Then the bubble began in earnest for another 5 months or so. Once the bubble popped, the market fell back to the same level that it was to begin with.
It took almost 18 years for the NASDAQ to recover the Dot Com highs but in less than 3 years the NASDAQ has already more than doubled in market value.
To replicate something like this today, the following chart shows the current NASDAQ chart. A breakout out of consolidation will usually double the previous move. The previous move from the March low was around 5400 points. That would project the price in the 17,500 area. A more conservative value would have the NASDAQ at the 161.8% Fibonacci extension area. My guess is that the NQ will eventually go somewhere in this zone.
Bubbles typically take decades to recover. The only asset I have seen that has bucked this trend has been the rise, fall and rise again with Bitcoin. I really can't think of another asset bubble that has recovered so quickly. You can see from the chart below that it took nearly 18 years for the NASDAQ to recover from the dot com bubble. Since recovering, it has more than doubled in just over 3 years. The rate of gain is accelerating.
My theory is that we are in a transitional period where stocks will enter a bear market in 2021 and the commodities market will be in a recognizable bull market. I think we will see enormous price appreciation in stocks over the next 4-5 months but we will probably see commodity price appreciation as well.
I see enormous opportunities this next year but it is not going to be easy...it never is. Riding a bubble using the leverage we use in futures will be difficult. Cycles and sentiment don't work well in bubbles. Our best forecasting tool will probably be history as it always repeats itself. When your waiter at your favorite restaurant begins giving you stock tips it will be time to move over to commodities....especially precious metals where the next bubble will occur.
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