AVANTI GROUP REVIEWS - Commodities Issue Warning Shot for Economy & Stock Market!

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Avanti Group Reviews

• Commodities Issue Warning Shot For Economy
  Stock Market!

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• It's time for an update on commodity prices.As I
  have written before, consumers understandably
  like to see prices for commodities decline, the
  more the merrier, particularly gasoline and
  energy costs.
• Many fundamental analysts also take commodity
  price declines as a positive for the economy, on
  the theory that consumers will have more spending
  money in their pockets, and manufacturers will
  have lower costs, so hopefully greater earnings.
• Investors tend to also take declining commodity
  prices as a positive for the stock market on the
  same reasoning.
• Unfortunately, history doesn't confirm the
  optimism.
• As a five-year chart of the CRB Index of
  Commodity Prices shows, declining commodity
  prices usually indicate demand for goods is
  dropping and the economy will soon be in trouble,
  which in turn is a problem for the stock market.

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• For instance, the CRB Index of Commodity Prices
  plunged 57, from 470 to 200 in 2008-2009. Good
  for the economy and stock market? Not hardly. The
  severe 2008-2009 great recession' and severe
  bear market in stocks accompanied the decline in
  commodity prices, and saw the SP 500 also plunge
  57.
• Before the economy slowed in the summer of 2010,
  and the stock market experienced the double-digit
  decline that summer, commodity prices had rolled
  over to the downside again.
• And before the economy began to slow again in the
  summer of 2011, and the SP 500 experienced a 19
  decline that summer, commodity prices began to
  decline again.
• Now, after only a brief recovery last year, the
  CRB Index of Commodity Prices has been back to
  the downside since last fall in spite of the
  economic recovery being back on track after last
  summer's stumble, and in spite of the stock
  market being in a significant favorable season'
  rally.
• So another reason to enjoy the favorable season
  rally while it lasts, but to remain alert to the
  technical indicators on commodities as well as
  the stock market.

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• Here's the thing about technical analysis.
• Columnists, stock brokers and retail investors
  love to analyze and discuss the fundamentals.
  It's easy to understand the good and bad points
  regarding a company's products, management,
  earnings, and so on.
• And it seems simple to form expectations for
  market or sector direction by judging whether
  some political situation, economic condition,
  unexpected event, or economic report, will be
  positive or negative for the market.
• The biggest attraction of fundamental analysis is
  not having to learn too much beyond what seems to
  be simple common sense. Government created record
  budget deficits and debt? Stock market can't
  possibly move into a four-year bull market. Apple
  is coming out with a new product? Cars or houses
  are selling well, or not. That kind of thing.
• On the other hand, using technical analysis
  involves a lengthy knowledge, learning and
  experience process first. In the case of
  columnists and brokers it would also require
  being able to have readers and clients accept it,
  difficult given that few readers or retail
  investors understand it, many not even aware it
  exists.
• Therefore, it's easier to write or talk about the
  easy to understand fundamentals. In the case of
  brokers and other Wall Street folks who come in
  contact with retail investors, it's easier to
  blow off technical analysis as voodoo and worse,
  than to have to learn anything about it or how it
  is utilized. It's even easier to recommend that
  investors simply buy what they are sold and hold
  on through whatever comes along.

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• But the fact is that behind the scenes
  professional money-management firms, mutual
  funds, hedge funds, giant pension plans,
  university endowment funds, and other
  institutions, employ almost as many market
  technicians as they do fundamental analysts.
• In feeding information to brokers as to which
  stocks they should be selling, brokerage firms
  employ market technicians and technical analysis
  as well as fundamental analysts. In fact some of
  the most famous Wall Street names, past and
  present, the likes of famed Bob Farrell (Merrill
  Lynch) are or were with brokerage firms. 
• It's not a new phenomenon. In his 1920's memoir,
  old time brokerage firm founder Richard D.
  Wyckoff wrote of his firm using charting and
  technical analysis to pick stocks that looked
  like they were about to make a move in one
  direction or the other, and then having to look
  up the company's fundamentals and use only them
  when discussing the company's stock with clients.
• Charts and technical indicators just don't care
  what the surrounding conditions or situations
  are. They simply show what the market is actually
  doing, whether money is flowing in or out,
  whether momentum continues or is reversing, and
  so on, not caring why or who is buying or
  selling, or whether common sense says it should
  be doing something else because of this or that
  situation in the news.