Clues for When the Speculative Party in Commodities and Stocks May End

I've been following commodities since the early 2000s. I have seen a lot of things, but I have never seen markets this disconnected from reality. If you sense some bitterness, you are correct. I turned bearish on commodities far too early and it has made for a treacherous start to 2021.Nevertheless, while commodities have forged intense gains as the media tout a new commodity super-cycle there is some reason for concern. Much of the commodity buying is done by those attempting to make themselves feel good rather than consideration of supply-and-demand fundamentals. For instance, some are buying copper for the same reason they have been buying green stocks. Copper is used in electric vehicles and therefore it must be an environmentally noble place to allocate parked cash. Others are buying grains because they are told the Federal Reserve's money printing is going to produce inflation and they will need to hedge that price risk. In essence, market inflation has yet to hit the Consumer Price (CPI), which is arguably flawed, but it is becoming a reality in the commodity markets via self-fulfilling prophecy. If this theory is accurate, lofty commodity prices won't last forever but picking a high will be a difficult game. Further, if you aren't already long, chasing prices higher is tempting but dangerous. Here are a few big-picture charts we have our eyes on that might offer some clues as to when, or if, the speculative party might end: The U.S. Dollar Index vs. E-mini S&P 500 While the government's economic stimulus and easy-money policies have resulted in too many dollars chasing too few assets, the consequence of their approach has been a discounted U.S. dollar. A cheap dollar tends to make domestic goods and services appear discounted to overseas buyers, thereby attracting investments and purchases of products. In short, a cheaper dollar creates an environment in which asset prices are prone to appreciation. The stock market is no exception to this economic rule. The weekly chart comparing the dollar index futures contract and the E-mini S&P 500 suggests sharp declines in the dollar are inclined to enable excessive equity market rallies. At the moment, we are seeing a significant divergence between stocks and the dollar. We expect the gap between the two assets to narrow, which would eventually lead to either lower stocks, a higher dollar, or both. The U.S Dollar Index vs. Crude Oil Simila.rly, the commodity complex, mostly assets such as crude oil and copper, have been largely propelled by a cheap dollar environment. A comparison chart shows a similarly wide disparity between the path the two assets are on. The Euro Currency Not surprisingly, if the U.S. dollar trades inversely to stocks and commodities the euro trades with a positive correlation. In short, a higher euro is generally accompanied by higher-risk assets and vice versa. Thus far in 2021, the euro has managed to hold its own. On the surface, there might not be a reason for concern, but the monthly chart reveals the euro is bumping up against long-term resistance and has failed to break out. If this continues to be the case, a sub $1.10 could be seen again. Such a move would be a massive drag on stocks and commodities. The U.S. Dollar Index Future The dollar has had a hard time getting up off the mat, particularly after breaking below trend line support near the turn of the year. Yet, a weaker dollar is not a foregone conclusion as most assume it to be. Indeed, the greenback has managed to stave off selling with multiple support levels looming nearby that could limit any additional selling pressure. While a stable dollar probably isn't going to change anybody's mind regarding stocks and commodities, a reversal in the currency surely will. To us, it appears as though the dollar is forging a trading channel between the high-80.0s and the low-100.00s. If the dollar finds a way to work its way back to the higher end of the range, the world will look much different later in the year. If not, the speculative frenzy in stocks and commodities might just continue.

Clues for When the Speculative Party in Commodities and Stocks May End

Fundamentals are failing us; it is all about the greenback, "green" bets and easy-money policies.

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