Is the Commodity Bull Market Coming to an End?

Oil and Power Industry

If you’ve got Netflix and are interested in music, I highly recommend checking out a four-part documentary called Hip Hop Evolution.

It traces the history of hip hop from its roots in New York’s Bronx and Queens, through to the gangster rap genre that took off in Los Angeles in the late 1980s.

I’m not a massive hip hop or rap fan. But what I found really interesting about the series was the influence of the political climate on the music. In the 1960s and 70s, parts of the Bronx were bona fide ghettos. The Bronx was burning — literally.

Relations between the black population and the police were non-existent. Racism was overt.

Ironically enough, this friction helped the music to evolve. During a power blackout in the Bronx one night, there was mass looting, and electronic stores took the brunt of it. A week later, DJs and MCs were all over the place, experimenting with their newfound equipment.

Over on the West Coast, in the 1980s, the police and the gangs of South Central LA were pretty much at war with each other. This climate produced the rap group NWA, and their success brought ‘gangsta’ rap to the world.

Again, not my cup of tea. But hats off to NWA (particularly Ice Cube) for taking it to the authorities. They were such a ‘threat’ to social cohesion that the FBI harassed them. They had a concert shut down when they ignored an earlier warning not to sing ‘F&*k the Police’. They did it anyway.

Dr Dre was also a member of NWA. He went on to have a massive career in the industry, and became a billionaire by selling his headphones company (Beats by Dre) to Apple a few years ago.

Gangster rap has certainly come a long way…

Among many other talents, Dre discovered Snoop Dog, who went on to become an industry superstar. He’s also a prolific advocate for (and smoker of) marijuana.

Why am I telling you all this?

Well, like many older people, I often lament the lack of progress or genuine innovation in music these days. A lot of that comes down to the political climate. There is a lack of widespread or obvious oppression now.

Easy money has translated into easy living. Kids don’t have a visible authority figure to rebel against.

And now that the US (and soon Canada) has legalised recreational use of marijuana, it seems like ‘the man’ is joining the party.

If you want to get in on the action — while continuing to mourn the lack of ground-breaking new music — check out Sam Volkering’s latest way to play the ‘pot stock’ revolution reaching Australia.

I wouldn’t be surprised if Snoop Dog has already taken a stake.

It’s good to see Australia still acting like an ignoramus on this front. While legalising marijuana is a smart way to start winning the war on drugs, we can’t even guarantee the hydroponic lights will be on.

For years, the pollies have been attending auctions and beefing up their investment property portfolios while the nation’s energy infrastructure falls apart.

It’s a good thing we have the commodity boom to paper over things. Or have we?

Late last week, oil prices fell heavily. Gold has been under pressure for a few weeks, and iron ore prices are off their highs from a few weeks ago. Is this just a standard correction for commodity markets, or is the fledging bull market about to come to an end?

I don’t have a clue, of course. No one does. But I will argue the case that the bull market isn’t over. It’s just pausing for breath.

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One of the ‘problems’ you have investing in the internet era is that market moves are overanalysed. There is just so much information out there and whenever prices move considerably, voices from everywhere weigh in with the ‘why’.

I’m guilty on that front too. But what I try to avoid is letting my ego and hubris get involved with the analysis. Too many pundits engage in egotistical analysis by making big calls about whether a stock or asset has bottomed or topped out.

The need to be right trumps the need for considered analysis. People are obsessed with trying to picks tops and bottoms in markets. This continually happens, despite the weight of evidence telling you it’s a fools’ errand.

So what follows is (hopefully) some considered analysis on the outlook for commodity markets, rather than just my opinion on where I think prices are heading…

Let’s have a look at some charts. Charts reflect prices. The price of anything is a very powerful piece of information. When we have a history of prices (as we do in a stock chart) it gives you important clues as to how the market is thinking.

Take the broad Thomson Reuters/Jefferies CRB Commodity Index. It’s fallen sharply over the past week, and is well off the highs reached in January. Does this mean it’s all over for the commodity rally?


Source: Optuma
[Click to enlarge]

No. I don’t think you can definitely say that until prices break below the lower green line in the chart. Until that happens, I would argue that commodities are simply trading in a sideways consolidation pattern.

The biggest negative influence on commodities recently has been the oil price. I speculated last week that oil would eventually break higher, but that the overcrowded positioning of traders in the futures market was a major threat to this outlook.

The sharp plunge in oil prices last week had futures market panic written all over it. We won’t know the effect on positioning for another week, but I’ll guess that plenty of traders got out last week.

The selling leaves the oil market looking fragile in the short term. But it’s not enough to say the bull market is over. Here’s a chart for Brent crude oil prices:


Source: Optuma
[Click to enlarge]

As you can see, the selling has pushed oil below the consolidation range it’s traded in during the past few months. But as long as Brent crude can make a ‘higher low’ in the coming weeks (higher than the lows made in July and November 2016), the longer-term outlook is still OK.

While it might be my personal opinion that the commodity market isn’t about to roll back over into bear territory, I’m not going to let that view distort my judgement, should the charts tell me I’m wrong.

In the world of investing, opinions are a less valuable commodity than lumps of coal. So don’t get too caught up with your own — or anyone else’s, no matter how eloquently they might espouse your beliefs.

And keep in mind that corrections aren’t crashes. Unless you’re a very short-term trader, you don’t have to get out at the first sign of trouble.

So, find a process or system for dealing with these sorts of markets. If you don’t, you’ll have to rely solely on your opinion. Over the long term, that’s just not going to work out for you.

Regards,

Greg Canavan,

For The Daily Reckoning

Editor’s Note: This article was originally published in Money Morning.

Greg Canavan
Greg Canavan is a contributing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.

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