We live in a world that's filled with suffering and disaster. From floods in Australia to earthquakes and tsunamis in Japan to revolutions and bloody counter-revolutions in the Middle East, the entire globe is going through an upheaval unlike any we've seen in a while.
And, as can be expected, so, too, are markets.
And when the markets are in turmoil, people naturally seek safety.
In our letter of February 17th, Gold Bit the Fricker, we saw the beginnings of a correction in the commodity sector and wrote thus:
Are futures traders back to examining supply/demand fundamentals? And could that lead to a revaluing of some very troubling speculation going on of late in the softs?
We'll see.
We'll also bet on the shine coming off foodstuffs in general.
Call it like this: a simultaneous retreat in the CRB (maybe played with the DBA ETF) and the S&P 500 – along with a who-could-have-guessed-it flight to an oversold Treasury market. [Italics added]
Friends, take it to the bank.
All the major markets topped out within a day of that report and have since slid between 6% and 8%. The foodstuffs, too, as represented by the DBA ETF, are off 9% since then and 10% from subsequent highs. And, lo and behold, U.S. Treasuries have been the beneficiary of a flight to quality that has been gathering steam since our call went out (in line with Middle Eastern stirrings) through the latest disasters in Japan. The long bond is up nearly 5% since our 17 February letter.
A look at a chart of those last two items brings the spec/safety dance into sharp focus. The top (brown) line is the PowerShares Deutsche Bank Agriculture Fund (NYSE:DBA). The lower (in candles) is the long bond, represented here by the iShares Barclays 20+ Year Treasury Bond Fund (NYSE:TLT).
Moreover, the long bond is now showing signs of entering a more concerted bull phase, as RSI and MACD move convincingly above their respective waterlines, the midway technical marker that's also a proven indicator of longer-term bull and bear moves.
Very clearly, the drop in DBA's price has precisely nothing to do with fundamental factors. When 250 million people across the globe suddenly experience food shortages, the price of foodstuffs does not drop by nearly ten percent. That's speculators unloading positions. Nothing more.
Yes, we're now paying more for food, as the latest PPI data shows. See here:
But clearly those prices are higher on the back of increased play from speculators, who now appear to be losing their interest rather quickly.
Look for volatile food prices to overshoot on the downside.
'And Keep Your Eyes Wide, the Chance Won't Come Again '
Keep an eye on the transports, too.
As we've been discussing intermittently this last while, the transports, along with the Baltic Dry Index (which is now coming off 52 week lows) are a wonderful barometer of business activity, highlighting the volume of goods contracted for delivery in the months ahead.
A few weeks back we noted a very toppy looking Dow Jones Transportation Average and reported on some very disturbing technicals, too. Thus we spake:
On a day of tight trading, when the Dow itself posted a gain of just 0.02% (1.81 points), the Dow Transports plunged an astounding 99 points or 2%. Moreover, a six month trendline was broken over two weeks ago, and all the price action is now fixed below a short term moving average that's rolling over. And if that's not enough, RSI readings have been sub-waterline since the trend break – with MACD now confirming with its own plunge below that marker.
And the situation today looks far more ominous than it did back then. Here's the same Dow Transports' bull move off last summer's bottom:
This chart shows a second trendline break and a head and shoulders top that's now moving ominously close to its neckline support level of DJTA 4880.
If that level is broken, we see a downside count that would bring the Transports to 4600. A first stop.
Wise traders might consider a pairs trade or otherwise make use of the Guggenheim Shipping ETF (NYSE:SEA), apparently the weakest performer in the transportation universe. See here:
Simply put, when nothing's moving, markets fall. Many happy returns,
Matt McAbby, Senior Analyst, Oakshire Financial
