It seems that most everyone is again focused on commodities and I continue to hear talk of $5.00 per gallon gasoline. I obviously can’t deny the fact that commodities have been in an uptrend. In fact, there is a longer-term cycle that averages some 3-years in the CRB Index. I identified the last 3-year cycle top in July 2008 right as everyone was looking for higher commodity prices. This cycle then bottomed back in February 2009. The current 3-year cycle top should ideally peak this year or at the outside it could potentially stretch into early 2012. However, this cycle is nonetheless next due to bottom in 2012 and conditions are ripening for the current top. Within this 3-year cycle is another cycle that averages about a year in duration and the current 3-year cycle top is at risk of peaking this year in conjunction with the current annual cycle top that is now due, or the next, which I look for to top a bit later this year. Either way, I believe that the risk of the 3-year cycle top being seen this year is high. It has also been my belief all along that the bounce out of the 2009 3-year cycle low is a counter-trend bounce, as is the bounce in equities. As for identifying this top, I have specific structural DNA Markers and indicators that I will be monitoring, which will allow me to identify this peak and which I will be reporting on in the monthly research letters. I say all of this as a warning just as I did back in 2008 surrounding that parabolic move into the last 3-year cycle top.
Now, as for parabolic moves, I have included a weekly chart of the Nasdaq 100 below. Beginning at the 4-year cycle low that occurred in October 1998, we can see that price rose sharply in February 1999. In fact, in that 4 month period this index moved from a low of 1,063.74 up to 2,150.83. This was a 102% advance in only 4 months. As we moved into October of 1999, this advance was much more modest, but still managed to advance another 400 points during this time period and in doing so the Nasdaq 100 had advanced 143% in a mere 12 months. As this move received more and more attention more and more people jumped on the bandwagon with the hottest tech stock. As a result, a bubble began to form. From the October low at 2,299.95 the Nasdaq then advanced another 2,516.39 points over the next 5 months. It was at this point that the advance went parabolic and in some 17 months the Nasdaq 100 had altogether advanced from the 1998 4-year cycle low at 1,063.74 into the March 2000 high at 4,816.34 for a total advance of 352.77%. From that high the Nasdaq 100 fell back to 795.25, which totally erased the entire move up from the 1998 4-year cycle low, in which the dot-com bubble began. Now, note the counter-trend dead cat bounce that followed the initial leg down into May 2000 and that once this bounce concluded note the outcome that followed. To date the Nasdaq 100 is still off of its high by some 52%.
In the example of bubble mania I want to show you a weekly chart of the Shanghai Index, which can be found in the next chart below. We all know what’s been going on in China and the extreme growth that they have experienced over the last decade. As the general population began to hear about China’s growth, investors flocked to their stock markets at record pace. I remember being at an investor conference several years back and virtually everyone was talking about China. If something was rising, it was because of China. I knew then that this was a sign of a bubble. But of course, no one could see that because “this time was different.” Well this time turned out not to be so different after all. From the 2005 low the Shanghai Index advanced from 998.23 into its 2007 peak of 6,124.04, which equates to an advance of 513.49%. This is yet another example of how a parabolic advance unfolds. These moves begin as normal advances out of normal cyclical bottoms. But, if an advance is strong enough to begin to attract a lot of attention, then at that point the herds begins to pile on board. It is this massive inflow of speculation that launches a move into a parabolic state. A parabolic advance will continue as long as there is an inflow of money to keep the move going. But then, at some point, the inflow of funds begins to fade and when it does gravity sets in. It is at that point that price begins to soften. As price begins to soften the smarter money begins to exit and prices begin to soften more. In the end all parabolic advances end pretty much the same and the late-comers to the party are typically left holding the bag. To date, the Shanghai Index is down some 51% off of its top. Note that in this case the initial leg down occurred in late 2008 and at this time the counter-trend bounce appears to have peaked in August 2009.
Next I want to show you what may be the biggest bubble of the last 34 years and I bet that only 1 in10,000 people, or less, even know about it. The chart below is a monthly chart of sugar. At the low in September of 1968 sugar was selling for 1.31 cents per pound. By January 1971 sugar had advanced to 5.32 cents a pound. This was a 306% advance over a 28 month period. By December 1973 sugar prices had advanced to 13.53 cents per pound, which accounted for a 932.82% advance from the 1968 lows. But, there was still more in this case as this is the point in which the parabolic price spike began and sugar finally peaked at 66 cents a pound in November 1974. This bubble had then advanced 4,938%.
But wait, at the time this was not viewed as a bubble. There were “reasons” to justify such advance. I found an article about the rising sugar prices in the early 1970’s and I thought that you might find this quote of interest.
“By the end of 1972, there had been four straight sugar seasons with record crops. Yet consumption actually outpaced supplies in 1972, literally eating into sugar inventories over the next year. The 1973-74 sugar season began with extremely tight supply conditions worldwide; demand continued to rise.” There were no stockpiles of sugar. Sounds to me like we had hit “Peak Sugar.”
The article goes on to say, “There was evidence that some big industry users were stockpiling sugar in anticipation of higher prices. Soon people were grabbing sugar off the shelves in armloads to offset rising prices. Others were grabbing cubes off restaurant tables for home use. Dinner guests were arriving with five-pound bags of sugar instead of the traditional bottle of wine or bouquet of flowers. Even people who had never given the sugar futures markets a moment's thought knew something was up when they walked into the local coffee shop and noticed that the sugar had vanished from the table. Quite simply, global demand for sugar had exceeded supply, and before long the price of sugar headed for the roof."
“Everyone had a theory for the high prices. Sugar traders had no idea where prices might be when the US's long-standing price supports expired at the end of 1974; some blamed the high prices on a ‘scarcity of cheap labour to harvest sugar cane’; others pointed to the failure of the European sugar-beet crop. Others even suspected that both the Soviet Union, which had just suffered two bad production years in a row in its own sugar crop, and ‘Arab oil money’ (remember that oil crisis of the 1970s?) had moved into the sugar futures markets, along with a rise in speculation by others looking to make money from rising prices.”
Guys, does this not sound familiar? Given the short fall of sugar inventories, increasing demand and a growing world of consumers, cheap sugar was a thing of the past. It was a new paradigm. Yes, it was “Peak Sugar” for sure and the world would never be the same again. For the most part if we replace the word sugar with the word oil in the above article it sounds like today. As you can see on this sugar chart, by 1977 sugar had dropped back down to just over 6 cents and by 1985 sugar prices had dropped to 2.3 cents per pound. In this case note that the rebound/counter-trend rally did not come until 1980, but it nonetheless fell short of the highs.
Now I want to show you a weekly chart of crude oil, which can be found below. Many of you may not remember, but in December 1998 crude oil touched .35 per barrel. I remember buying gasoline in December of 1998 for 68 cents a gallon. Between 1999 and 2001 there were major longer-term cycles bottoming in most every commodity. As price began to advance out of these naturally occurring cyclical lows no one gave too much thought to them. But, as price began to move up, commodities drew more and more attention. This in turn drove prices higher and higher and higher. As we moved into 2008 the advance in crude oil had become parabolic and hit an all time high of 7.27. As prices advanced, just as with sugar, people began to say that it was for this reason and that. Some say that it’s because of the weak dollar. If that’s the case then why is it that oil was trading in the 14 to 20 dollar range between 1992 and 1995 when the dollar was trading in the low 80’s, which is less than 5% from where it is now? Others say that it’s “Peak Oil.” I’ll be honest here. I simply do not buy the argument that “Peak Oil” is the sole reason oil prices advanced 1,281% into the 2008 top or that it has been the reason for the advance out of the 2008 low. Now, this is not to say that long-term supply is not a factor, but the real demand for oil has not changed so drastically over the last 10 to 12 years in a way to justify this sort of a move. The advance into the 2008 top began like any other advance. Sure, there may be some long-term supply issues just as there was with sugar in the early 1970’s. But, as this advance in oil unfolded, it drew attention because of the stories of Peak Oil and China and so on. As a result, people began to jump on the hottest trend and the normal advance was transformed into a parabolic mania. It is that simple. Also, as with any parabolic speculative driven advance it was the Johnny-come-lately who got burned once the inflow of speculation began to fade.
The parabolic portion of a move is kind of like throwing a ball into the air. At first the move is hard and fast as there is plenty of energy and momentum behind the move. But, at some point, the momentum begins to fade. There is then a point in which the ball sort of hangs in the air as the fight between the last remaining bit of forward momentum competes with gravity. This is the point in the speculative mania in which the masses are “all in.” At that point, the masses have committed themselves heavily and there are not enough new speculative buyers to keep prices rising. This is when gravity takes over, the ball rolls over and picks up moment to the downside. This point occurred in July 2008 and in February 2009 the ball hit the ground. The bounce that has occurred since is a rebound. Rarely do rebounds take price back to their previous high. As a result, this should be a counter-trend move. Problem is, most people believe that the old parabolic advance is back and as they jump back on board to fuel the bounce, ultimately the bounce fades and once again the Johnny-come-lately’s are left holding the bag.
I have said all along that the bounce advance out of the 2009 low in equities is a bear market rally that will ultimately prove to separate Phase I from Phase II of a much longer term bear market. That view as not changed and I believe that these other asset classes are also in counter-trend moves just as equities are and once these counter-trend moves run their course, the bear market forces will again become evident.
Fact is, we have a 33 year old bull market in equities that peaked in 2007 in conjunction with these other longer-term parabolic move that you don’t even know exists unless you back up far enough away to see it. On top of that we have the Fed that clearly saw the air being let out of the equity parabolic advance back in 2000. As a result, they literally began to take unprecedented measures in an effort to keep the wrapper on things and were in fact able to reinflate equities into their 2007 top, which again, only made matters worse. In the process they helped to fuel a housing bubble in which the fallout is still being felt. We have seen a banking crisis that people seem to already be forgetting about. There is still an ongoing credit crisis and there should be another shoe yet to drop. Then there was the commodity bubble on top of that. All combined, the consumer has been hit hard from every angle and drained for everything he is worth. The average person has been lead to believe that the worst is behind us, but I don’t think this will prove to be the case. With housing prices still declining and tight lending policies the house can no longer be used as a bank. Fuel prices are again rising and will cause the consumer to cut back once again. And all of this is occurring within the context of these rebound moves prior to the other shoe dropping. Basically, it is exactly like I said it would be all along in that the manipulative efforts to keep the stock market up have only served to make matters worse, as proved to be the case into 2008 and the 2009 low. Be it QE 2 or QE 10, these manipulative efforts will only serve to make matters that much worse once these counter-trend bounces run their course.
