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business newsDon't Get Trampled by Herd as They Move Out of Commodities, Stocks
By
Ron Coby
Jan 10, 2011 8:00 am
The dollar looks to go higher and commodities look to go lower. Stocks should be next, so watch closely for fresh sell signals to get short.
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Most commodities and stocks have been rising together for some time. Such a high correlation of asset classes is a clear sign of herding behavior. When the herd goes from buying everything to selling everything, a nasty correction will take place. A correction in commodities has already started and soon should extend to stocks as well. My firm has sell signals on our timing indicator across the board in commodities. The herd is slowly changing direction in commodities and will soon do the same in stocks.
Sentiment is nearing euphoric levels according to recent polls in stocks and everyone seems to be bullish on the commodities. There is way too much complacency as confidence in the Fed’s ability to backstop any losses has skyrocketed. This is evidenced by the fact that a few weeks ago the volatility index hit the same low levels it did before the 2008 collapse and right before the "flash crash" last year. The current stock market and most commodities are overbought just like before the 2008 collapse. All we are missing is a sell signal to start taking shots on the short side in stocks. We already have the sell signals in commodities almost across the board.
The next phase of the European debt crisis is likely a catalyst for renewed weakness in stocks and the global economy. The euro has thrown off a new fresh timing sell signal as it heads into a big downtrend and looks poised for new cycle lows. The EU's debt domino started its fall in Greece and recently extended to Ireland. Soon it will knock into Spain, Portugal, and Italy. As these PIIGS get slaughtered, other pig nations that gorged themselves in debt and mass bailouts will eventually follow. This debt domino will tip over into Belgium, the UK, France, and ultimately Japan and even the United States. There will be rising interest rates across the globe. Any coming rally in US bonds should be sold by investors and shorted by speculators. We are hoping for such a rally, but it simply may not happen.
Another catalyst for falling stocks could be a near-term “double dip” in housing which many prominent real estate experts are forecasting. We will be watching the IYR (real estate ETF) for confirmation of these double-dip projections. Right now the IYR appears to be building a giant top but it’s too early to make a big sell call there. The foreclosure crisis could accelerate once again in the US and is certain to happen in Spain. That’s why the Spanish domino could be next.
The coming correction in commodities and stocks might turn into another buying opportunity -- but who knows really? It's just as likely to turn into something much worse. We will have to take it one day at a time while following the giant’s footprints in the sand. Right now those footprints are exiting gold, silver, the euro, grains, and all kinds of commodities. Even oil threw off a Grail timing sell last week. It looks like the giants are running into the dollar. So the dollar looks to go higher and commodities look to go lower. Stocks should be next, so we are watching closely for fresh sell signals to get short. Get ready or you’ll soon get trampled if you hang around too long in commodities and stocks.
No positions in stocks mentioned.
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