December 26, 2014
By Steve Blumenthal
All cycles eventually come to an end. In the case of commodity bulls, 16 years is the average duration. The longest lasted 24 years (1896–1920), the shortest lasted 8 years (1972–1980), and the most recent secular bull ended in 2011 after 12 years.
What ends a commodity bull cycle? Success. Success invites increasing amounts of capital—oil is a prime example. High prices over a number of years invite competition; capital races in, with more drilling, new technology, fracking, shale, natural gas, and alternatives. High prices drive the need for improved fuel efficiency. Supply and demand imbalances force corrections, but in commodity cycles, those corrections tend to take time. Producers need to cut production, but no one wants to.
There are conspiracy theories surrounding the Saudis, Syria, the United States, and Putin’s Russia; however, the real bull market cycle killer is success itself. With capital committed and drilling in place, the players exit the game slowly.
In this weeks shortened On My Radar, let’s take a look at several charts that detail the long-term commodity market secular (long-term) cycles. What do they mean for 2015? In short, expect a wide trading range, leading ultimately to even lower prices. We are in the early innings: the average commodity secular bear cycle is 20 years.
Included in this week’s On My Radar:
- Thoughts on the Commodity Bear Cycle
- Gary Shilling – $20 Oil
- Trade Signals – Weight of Evidence Supports Aged Bull Market 12-24-2014
Thoughts on the Commodity Bear Cycle
Here is the historical data on Commodities—Secular Bull Markets (shaded grey) and Commodities—Secular Bear Markets (white):
The next chart shows commodity prices since 1800. Note the arrows marking bull market tops tied to the peaks in price momentum (large yellow circles). This chart shows, as NDR Research says, “that the momentum of commodity prices has a history of killing its own super-cycles.” Source: NDR Commodities 2014 and Beyond Dec 18, 2014.
With permission, for which I am very grateful, I have attached an excellent piece from NDR entitled “Commodities 2014 and Beyond.” The research takes a look at what the Saudis did in the 1980s to knock much of their competition out of the oil game (a playbook they appear to be following today). And there’s this note on gold:
“Much to the disbelief of gold bugs, the gold market is saturated; another common trait of aging super-cycles. Yet, gold producers cut reluctantly, or not at all. As commodity super-cycles die, producers often do what they need to do to survive, which may or may not be at marginal cost.”
Here is the link to the full piece. It is a great read.
Gary Shilling – $20 Oil
Gary provides a short but good summary of what is going on with oil. Link here.
Trade Signals – Weight of Evidence Supports Aged Bull Market
The weight of evidence continues to support the aged cyclical bull market. Click here for my recently published Forbes article discussing the probabilities for 2015. Risk is high and the equity market is expensive. Let’s keep a close eye on Big Mo and 13/34 Week EMA (charts are updated in this piece every Wednesday).
Included in this week’s Trade Signals:
- Cyclical Equity Market Trend: Cyclical Bullish Trend for Stocks Remains Bullish
- Volume Demand Continues to Better Supply – Remains Bullish for Stocks
- Weekly Investor Sentiment Indicator:
- NDR Crowd Sentiment Poll: Bearish
- Daily Trading Sentiment Composite: Neutral to Mildly Bullish for Stocks
- The Zweig Bond Model: Cyclical Trend for Bonds Remains Bullish
Click here for the full link, including updated charts, to Wednesday’s Trade Signals post (trend and sentiment charts).
Conclusion and Snowbird
The implications of an extended bear market in commodities should be considered as you shape your 2015 portfolio(s). One idea is to put a stop loss exit discipline in place in order to reduce or hedge exposure. For many individuals, a price drop below a simple 200-day moving average (MA) line can be useful. Here’s an idea that I like: weight gold within a portfolio at between 5% and 15%. If it’s below its 200-day MA, then hold just 5%; if above, then hold 15%.
While fundamentally many commodities appear to be in the grips of a bear cycle, gold is ultimately a hedge against the idiocy of politicians, and thus I feel some exposure to this risk asset is prudent. Just how much depends on the strength of your view and the patience you have to see that view through. As with all assets, have a plan in place to manage the downside risk. A simple 200-day MA or something like a 13-week over 34-week EMA (see Trade Signals) may prove helpful.
Today is packing day. Other than this letter, the big job for today is to pack the ski equipment for our gang of eight. Ugh – a lot of stuff. With another great holiday celebration behind us, excitement in the house is immediately ramping back up. We’re off to one of my favorite places in the world: Snowbird Utah.
The snow is falling, and five powder days are ahead. Lucky us! My father took me to Snowbird when I was a senior in high school. Now, 35 years later, as I do each year, I’ll be hat (well maybe helmet) tipping my old man atop that beautiful mountain. Miss you, Pop—and thank you! What a great gift.
Speaking of gifts, whatever your faith, I hope your celebration with your family was outstanding.
Have a wonderful weekend!
With kind regards,
Stephen B. Blumenthal
Founder & CEO
CMG Capital Management Group, Inc.
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