After a 16% decline in the price of crude oil and a 14% decline in overall commodity prices, as measured by the CRB Index, questions are rising about the status of the secular bull market in commodities.
The fact is that although no one wants to say it, it is possible that we may have seen a long-term top in the price of crude oil. The problem with making any such claims, is that it's nearly impossible to make such assessments without having at last several weeks, and sometimes months worth of evidence.
The top of the dot.com bubble took months to become clearly evident, although the losses were already significant by the time the trend was already established.
The technical evidence at the current time in the oil markets, though, suggests that something is ongoing, as the 200 day moving average, the line that divides long term up trends and down trends is being tested on key major commodity stock indexes, as well as futures contracts.
For example, stocks like Halliburton and Schlumberger have been in major and very aggressive down trends for some time.
Both are key components of the Philadelphia Oil Service Index, which has collapsed over the last few days.
Gold prices have also taken a hit recently, with the $600 area now being tested, and breached on 9-11, although prices rose back above the key benchmark overnight.
There are many reasons for a significant pull back in commodities.
First, oil prices have been on the rise since the 9/11 attack in 2001, with nearly a non-stop bull run during the period.
Second, the Federal Reserve has raised interest rates four fold over the last several years after taking the Fed Funds to 1% after the 9/11 attacks.
And third, there are now clear signs that the U.S. economy is starting to slow down, as housing prices fall, and thus the borrowing power of home equity is starting to fade.
Not So Fast
Still, the bears should not be dancing in the streets just yet, as little has changed in the supply equation for oil, which is the centerpiece of the commodity equation.
Aside from the discovery of new fields, such as the Jack find in the Gulf of Mexico, and the expectations of new refinery capacity coming overseas, little has changed in the U.S.
The Gulf of Mexico is still vulnerable to natural disasters. Political pressures still make in nearly impossible to build a refinery in the U.S. And investment in alternative energy remains significantly below what it should be.
In other words, the decline in oil, and thus commodity prices, at this point, is more due to a fall in demand, than to an oversupply.
The key to commodities, is supply. Only when supply is so overwhelming that it can swamp the most robust demand, do you get an end to secular bull markets.
What's our point?
It's hard to argue with the charts. Thus, as traders, we go with the trend, which at this point favors the bears.
Yet, it's also important to remember that commodity markets can swing on a dime, a whim, or even a series of sudden developments.
Hurricanes, earthquakes, terrorist attacks, and even political maneuvers can lead to significant trend reversals.
Still, the fact is that the consensus is that oil prices will stay high forever, which is usually the sign that indeed a trend is vulnerable.
We will likely know how this turns out in the next few weeks, when the first freeze hits, or in the unfortunate event of a major hurricane hitting the Gulf of Mexico.
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