26, 2007 -- The mentality in the stock and commodity markets continues to be, "buy the dips." A week ago for instance was the 20th anniversary of the Great Crash of '87 and stocks and commodities tumbled badly. But there was no follow thru weakness. The Dow bottomed on Monday and the CRB on Tuesday and the bulls chased both high flying markets into this afternoon's settlement. Buying dips worked again.
A month ago, I explained how stocks and commodities have been moving in tandem this year and showed that historically, such a scenario is as rare as hens teeth. History shows that when stocks are strong commodities are generally weak. Or, vice versa. This year they have been marching higher on a regular basis. "History be damned. Buy the dips!" stock and commodity bulls cry. "
But I am very uncomfortable with such a scenario and do not believe it can continue. At some point, stocks and commodities will divorce themselves from each other. Or, both will begin to move lower. The upside potential at this point in time is limited since both are, for all intents, at record setting levels and signs point to a weakening US economy.
The bull argument justifying higher commodity markets is a sound one. The dollar is at a record low and crude oil a record high, giving all hard asset markets a bullish tone and fostering a, "buy the dips" mentality. That of course is why the CRB nearly posted a new all time historic high today. It was that strong! The bull argument justifying higher stocks is also a strong one. The Fed is cutting rates and bond prices are on the rise. History shows that as bonds go, so go stocks. And that of course is why the Dow bottomed on Monday, rose each day of the week and finished with a gain of more than two percent.
Causing me even more uncomfort is the Fed cutting rates again this coming week. They are lowering rates out of fears the housing problems are going to either get worse or linger to the point the economy will be pushed into a slow growth mode. Or, something worse such as a recession. Lower rates may be bullish bonds but not necessarily bullish stocks and commodities.
Another concern I have is consumer confidence falling to its lowest reading in a year. The University of Michigan Surveys of Consumers showed ordinary consumers are concerned about the housing slump and rising energy costs. When Main Street begins to worry about the economic outlook, investors and traders should worry as well and not be so eager to chase markets that are pricey by any measure.
Some are not worried. Mark Hulbert, founder of Hulbert Financial Digest has been tracking the advice of more than 160 financial newsletters since 1980. He wrote an article for MarketWatch, entitled, "Market's volatility making timers skittish; that's bullish." Mr. Hulbert admits there has been extraordinary volatility in recent sessions with the Dow. He claims that, "many short term market timing newsletters have reacted to the markets volatility by, "throwing in the towel. They just can't take the ride." From a contrarian perspective, Hulbert argues, "that's bullish." He ends the article by saying, "The bottom line? Anything can happen. But, from the perspective of a contrarian analysis of sentiment among investment newsletters, odds continue to favor the bulls." With the dollar at a record low, crude oil a record high and the Fed cutting rates aggressively, certainly the odds favor the bulls in both stocks and commodities. But do not think for one moment that the extraordinary volatility being seen in both markets is necessarily bullish simply because "short term market timers" seem to be "throwing in the towel and can't take the ride." My guess is, short term market timers view the volatility as I do; not the place to be if you are trying to hang on to your money!
My bias is no different than that of a month ago when I began suggesting that rallies in stocks and commodities be sold rather than dips being bought. My reasoning for such a strategy has not changed; The Fed is cutting rates to help soften the landing when stock and commodity values begin to deflate from todays historically high valuations. The markets are not cheap; metals, grains, cattle, stocks, crude oil, the Dow Jones and the CRB are at their highest levels in history or the very least, the loftiest levels in decades. In a robust economy such values are justified. In a weak economy being supported by a string of rate cuts, we may soon understand the old saying, "the best cure for high prices is high prices."
(The information in this article is the opinion of Commodity Insight's Jerry Welch and subject to change without notice.)