There really isn’t much to report regarding the stock indexes. On Friday there was a late day rally, but still leaving an inside bar. There was some follow-through early in the session today, but the rally faded on declining volume. Trend and momentum are still pointing south. However, there may be hope for the bulls. If the lows of the last three sessions can hold somewhere in this region, there is a potential inverse head-and-shoulders forming. In combination with the declining trend in volume and declining momentum in the moving averages, this could be setting up for a powerful reversal. This scenario may not play out, and it is very premature to assume it will at this point, but it is a possibility. I’ll wait a day or so to post a chart. I’m afraid if I post it now I’ll jinx it and the indexes will immediately take out the October lows.
The above chart if of the Baltic Dry Shipping Index. Earlier in the year I became very bearish on anything commodity related. I am a long time gold bug, so it was difficult to go against my nature, but there were many clues that the great commodity bubble was in the process of bursting. First, the China bubble burst. The talking heads and newsletters were suggesting that the China boom was just beginning, and that China would continue to drive up prices of nearly every commodity on the planet. Sentiment was overwhelmingly one sided toward the bull case, as it was with grains, oil, gold, at the same time as being overly bearish on the US Dollar. Regarding the dollar, some of the most respected investors, traders, and analysts said there was little chance of a recovery as far out as they could see. I knew bearish sentiment could not be sustained, yet there was little technical evidence of a change in direction. China was starting to unravel, however oil and other commodities kept climbing. The dollar continued to fall more than 10% when I started becomming bullish, further fueling the commodity bubble. I still didn’t have any technical evidence of a turn-around.
One indicator that can sum up much of this activity is the Baltic Dry Index, and it can sometimes give leading clues. It is largly influenced by shipping to China, and it is also influenced inversely by the US Dollar, and it is obviously sensitive to raw commodity prices. You can see on the chart that the cost of shipping has risen by a huge percentage over the past few years, and is up over a thousand percent going back a little over six years. You can see after that huge double top and prices have erased the entire gain on this chart. The double top was accompanied by a huge divergence between the Baltic Dry and some of the Chinese stock indexes. At the peak, or second push to a high in April of this year, many said this new high was a precursor to ever higher commodity prices. Even the CEO of DryShiPs came on CNBC almost to the day of the peak, and said this was just the beginning of the next big wave up. Ken Heebner of the CGM Focus fund had been on CNBC many times saying commodities were the best asset class to be in, and most of his positions were in commodity related securities. He is now mostly out, but not sure of his timing in relation to those comments on CNBC. Jim Rogers said the dollar was in a never ending spiral down. Mr. Rogers may still be right in the long run, but the dollar has had one huge rally after a long sideways basing period. He does still have books to sell on hot commodities. The list is long of those who were bullish far past the top. It is difficult to go against the opinion of such well respected people, but one must use sentiment and technical indicators to avoid getting crushed when nearly all traders are on one side of the boat. It can never last. The up and down cycles will continue as long as there are markets to trade.