|
|
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 a 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 band wagon 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 and I still remember
people talking about the tech stocks and why tech was back at the 2002
bottom. 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, then 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 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
sugarcane'; 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 $10.35 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 $147.27. 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. Much
worse in fact and 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.
Tim Wood
Editor, Cyclesman.com
Copyright
© 2004-2008 by Tim W. Wood. All rights reserved.
|
|
