11, 2008 -- A personal rule of thumb for trading is; "a market closing poorly on a Friday, can lead to deeper losses on Monday and the rest of the following week." That is not to say that every anemic settlement on the final day of the week will always lead to lower prices. But history does suggest that any market slumping badly on the final day of the week is a bearish omen if attitudes do not change. And that is why I am quick to say, "never carry a long position into the weekend if it closes weak on a Friday!" Two markets in particular closed ugly at this weeks end, boding ill for the period ahead. One, the Dow Jones that experienced it's first negative week in five weeks, ending with a triple digit loss. The other, Chicago wheat prices fell to a level not seen since the opening days of January, four months ago.
Tipping the Dow into the red was General Electric as it stunned investors and unexpectedly cut their annual profit forecast and quarterly earnings fell for the first time in five years. Stock in GE fell 13 percent, the largest since the Great Market Crash of 1987. The sell off put investors on alert that if GE can stumble because the sub prime/credit crunch mess, no one is safe. As the managing director of Scotsman Capital Management said in an appearance on CNBC, "GE is suppose to outperform in bad markets, they always have. This is a big shock to the system." The collapse of wheat prices in Chicago in the final few minutes of trade going into the weekend was, in my view, a shock to the commodity system just as the drop in GE shares was a shock to the Dow. Wheat has been one of the strongest of all commodities for nearly two years. But after the exceptionally poor settlement close seen today, it is now one of the weakest of all commodities.
When markets peel apart, melt quickly in value as the Dow and wheat clearly did, it suggests the psychology in the marketplace has flipped from bullish to bearish. According to the Reuters/University of Michigan Surveys of Consumers released this morning, "US consumer confidence fell to its lowest in more than a quarter century in early April, diving deeper into recessionary territory on heightened worries over inflation and jobs. The April result is the lowest since March 1982's level when the 'stagflation period of low growth and high inflation was still fresh in the memory of many Americans. Persistently high food and fuel prices as well as rising unemployment have caused consumers to view their future financial prospect more negatively than any other time since 1980." Those not paying close attention to commodity prices should consider these facts; crude oil has gained 14.75 percent for the year; gasoline prices posted a record high this week of $3.36 a gallon; natural gas prices this week were up 6 percent; rice is up 51 percent for the year; riots over food shortages broke out in Egypt, one of the worlds largest importers of wheat; cocoa and sugar prices for the week were up 12 percent and 7 percent respectively; copper prices are up 30 percent for the year and corn prices are up 28 percent year to date.
Compare and contrast, on the other hand, commodities to the US equity markets. The Dow Jones is down 7 percent for the year; the NASDAQ is in the red by 14 percent; and the S&P is in the ugly by 9 percent; Stocks drool!
There is no denying the fact that commodity prices are poker hot.Yet wheat, a leading indicator for commodities is now at a 4 month low. If wheat prices can sour, other commodities now perched at or near historically high levels can also sour. And if they do, as I suspect they will, the blame can be placed on market psychology flipping from bullish to bearish as suggested by the survey of consumer confidence showing a collapse to a 26 year low.
It is interesting to note that the last time shares of GE tumbled so badly as they did this week was on the very day of the Great Market Crash of 1987, also known as Black Monday. The crash took place on a Monday, but on the Friday before, the Dow plunged deeply and a host of commodity markets including wheat, ended in the red as well. The key to dodging the enormous losses associated with Black Monday in 1987 was not to have held tight to a long position going into the weekend.
Confidence in the long side of the ledger is dimming as indicated by the poor closing prices seen at this weeks end for several stock and commodity markets. It will not take much of a nudge for even lower prices to be seen if the news continues to bad. And the news should continue to be bad.
(The information in this article is the opinion of Commodity Insight's Jerry Welch and subject to change without notice.)