For the past few months, there have been some catalysts that have depressed commodity prices. The number one reason has been the rally in the dollar caused by Italian elections, Cyprus’ banking issues, strong U.S. economics, and anticipation of Japanese easing monetary policy.
Earlier in the month I suggested that we would likely hit a soft patch in Q2 and projected that the markets would remain weak through most of May. However, given the risk of recession remains a remote possibility, any pullback in the markets would serve as a buying opportunity. I believe the U.S. economy is still on a growth trajectory and if an economically weak Europe can re-energize in the second half, then the markets should head higher with cyclical sectors leading the charge.
One of the apparent conundrums of US Fed money printing in the current cycle is lack of headline inflation, at least as measured by the CPI. Certainly the CPI calculation itself is open to debate in terms of whether it is accurately depicting the cost of living in the US.
The technical picture of the market is as weak as it has been in many weeks. The percentage of stocks that are in good shape technically fell sharply last week. There was a 10% decrease in stocks that are in either basing or advancing patterns on the S&P 500, falling down to 74%. Things are worse in the small cap land.
One of the concerns of late is the weakness in commodities and what that portends in terms of global growth going forward. Many argue that the slide in commodity prices is discounting a collapse in global growth in the near future.
At a time when the Federal Reserve Bank has been debating how to end QE, recent developments in the economy have shown a deceleration in activity that has also transmitted into lower commodity prices. Stocks have been extended for some time, but have recently pulled back to support; while internally, many sectors have already exhibited sizeable corrections since February and March.
As highlighted in a previous article, while the economy is on solid footing with little chance of a recession on the near horizon, there were some warning signs that we could be due for a soft patch in Q2.
The S&P 500 suffered its worst decline since November of last year with a decline of 2.30%. The Dow was off by 1.79%. All sectors suffered losses today but the selling was magnified in the commodities-linked stocks. Just 7 stocks in the S&P 500 closed higher today. Selling intensified in the final hour of trading after news of the bombing in Boston broke.
While gold and silver bullion have fallen considerably since the highs reached in 2011, and mining stocks have fallen even more, I believe the weakness behind much of this move is due to the transition from the bull market in precious metals to its next phase.