In this paper, we take a look at just two asset classes which claimed a huge share of the limelight when they sprung to dizzying heights sometime back- Commodities and Equities.
In order to get a long term perspective of how Commodities have moved vis-a vis the US stock markets, I have taken the following timeframes based on the data available
Oil -1990 till date
Gold -1996 till date and
Dow Jones: 1945 till date.
OIL
GOLD
DOW JONES
Almost instinctively, one can notice that the commodity segment and the equities witnessed a synchronized bull run into 2008 - the only difference being that the rise in commodities was steeper than that witnessed in the Dow during the period 1996 – 2008.The plunge which subsequently followed proved no different. While the moves have been closely correlated to each other, the pace of the decline has been the steepest in oil when compared to equities or gold.
Where do we go from here…..??
We will now zoom in on the price movement in the past one year for all three categories to look at what could possibly unfold in the markets going forward.
Lets begin with the ‘fuel’ling force of global economic growth, namely oil. In the chart given below, price is being well supported currently at the rising trend-line drawn from $35.We could see a pullback, possibly towards the recent highs of 75 once again.
OIL
However that said, the RSI indicator (in green) has given a downside break of the indicator trendline. The implication is that after a recovery, oil could dive again.
The Fibonacci retracement of the entire fall from 140 comes at the following levels:
77 (38.2% retracement)
90 (50%) retracement)
103 (61.8% retracement)
As part of the recovery, I do not rule out the possibility of an overshoot above $75 to the 50% retracement at $90.However after this, oil is more likely headed down than up. This has got serious implications, in that the current recovery for the US is fragile and will end when the majority is most convinced that the recession is behind us.
Age-old Hedge against Inflation –GOLD
For those of us who have been constantly told that there is no better hedge to inflation than gold, it is indeed surprising to see gold hesitate so much, each time it comes close to the $1000 mark……when it should have simply breezed past it to make new highs, given the backdrop of unending free money infusion by the Fed. Herein, maybe lies an important cue. Notwithstanding the fact that a possible 7 out of every 10 persons view inflation as the natural and inevitable consequence of such an unprecedented liquidity easing, gold somehow seems unconvinced……
I would therefore bet, that a break below 870 would only serve to confirm the worst fear of policymakers and businesses alike –which is of deflation. And this, I still think is probably what the United States is headed for in the coming years.
Lastly, taking a closer look at the very barometer of confidence, viz., the Dow Jones Industrial Average I would prefer to name the current recovery at best, as nothing more than a bear-market rally
Dow Jones
The Dow, as can be seen has taken a V-shaped recovery. Barring a dip towards 7000, the short term could see another recovery which could take the index towards 10,500-11,000 to test the trend-line resistance (in blue). This would render excellent opportunities for exit of US stocks. This recovery could be swift and while the exact timeframe may be difficult to call at present, I personally think that the levels are what matter and will be closely watching for reversal signs upon a progression to these targets.
When most retail players begin to jump into the market, trying to catch up on the lost rally, I think that will be a vital indication that the next slide down to the long-term trend-line support at 3500-4000 has begun.
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