Saturday, May 07, 2011

Two Charts: Stocks and Commodities

For your consideration: two simple charts, one of stocks and one of commodities.

Even those readers who dislike charts are interested in the cost of living--and that leads back to the the price of commodities, which are reflected in this chart of the CRB commodities index. Sometimes it's advantageous not to out-think ourselves, so here is a very simple 10-year chart of the index.

Note that the index reached a key resistance level going back to 2006, and then rolled over. Also note the steep speculative blow-off-type rise over the past year, as the "global inflation, growth boom in the developing world" story became dominant.

In broad brush, the global credit-housing bubble topped out in 2006, and commodities fell as the bubble deflated. Then Central States and central banks stepped in to "save" their respective economies with various credit-expansion schemes, and commodities responded by shooting up in a classic speculative bubble ascent.

The whole loose-credit-feeds-speculation feedback blew up, as it always does, and commodities (and stocks and housing) crashed spectacularly.

The Federal Reserve launched its unprecendented Central Planning QE2 campaign in mid-2010 which promptly sparked yet another speculative risk trade bubble in stocks and commodities. Interestingly, that speculative train just ran off the cliff at the old 2006 high.

If we keep things simple, the rally looks a wee bit shaky.

Next up, an equally simple chart of the NASDAQ stock market. The Powers That Be have chosen the stock market as their favored proxy for the entire U.S. economy, and so they were extremely anxious to goose the NDX to a new nominal high, to persuade everyone who follows the market that "stocks are breaking out to new highs, get on the Next Great Bull Market Train now!"

The PTB got their nominal new high, but it remains to be seen if this was merely a false breakout to suck in bagholders or the real thing. This simple chart suggests there is an alternative pattern in play: a classic double top, which would set up a major decline.

Nobody knows what will happen, but keep your eye on the dealer. The game is looking a tad dodgy here.

NOTES TO READERS: Thank you for your many emails this week. Due to various emergencies and pressing real-world demands, I have had no time to respond. Please accept my apologies.

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