Stock and Commodity Markets Consolidation Phase Continues

By: Donald_W_Dony

In the follow-up to the May newsletter, equity and commodity markets are continuing to trade in a consolidation phase after the low in mid-March. Both stocks and raw material indexes are moving in tandem and in an average 14-16 week cycle. This would suggests that the next trough should occur by late June.

Underlying support for the S&P 500 remains broad with over 90% of the stocks in the index trading over their 200-day moving average (Chart 2). Therefore, downward pressure can be expected to be mild as the index approaches the June low. The downside target is 1300 or 3.5% from current levels.

The more volatile CRB is expected to follow a similar path as the S&P 500. Models are indicating that oil, base and precious metals should remain in a flat trading range over the next 4-6 weeks. The downside target for oil is $93-$95. For copper, it is $3.60-$3.80, the price target for gold is $1440-$1450 and silver has a June target of $30-$31.

Bottom line: Models suggest that stock and commodity indexes are expected to continue trading in a consolidation until late June. As broad market participation remains high for the S&P 500, the anticipated trough should be shallow. The CRB, which is tracking equity growth, has additional volatility due to the recent stability of the US$ and the overrun in oil and precious metals.

Investment approach: The business cycle is only at the halfway point which suggest another 18 months of expansion. This implies that the longer term outlook for equity markets remains positive. Commodity markets are moving in close tandem with stock indexes (Chart 1). Continued higher raw material prices eventually creates inflation. Portfolios may wish to hold securities that move with these pressures. Real return bonds and commodity index ETFs such as DB Commodity Tracking Index (DBC) or Claymore`s Commodity Index (CBR) are vehicles that normally profiting from the ongoing rise in inflation.

More analysis about the anticipated market pullback and the expected direction of global stocks and commodities into mid-year is in the May newsletter.

By Donald W. Dony, FCSI, MFTA
www.technicalspeculator.com

COPYRIGHT © 2011 Donald W. Dony
Donald W. Dony, FCSI, MFTA has been in the investment profession for over 20 years, first as a stock broker in the mid 1980's and then as the principal of D. W. Dony and Associates Inc., a financial consulting firm to present.  He is the editor and publisher of the Technical Speculator, a monthly international investment newsletter, which specializes in major world equity markets, currencies, bonds and interest rates as well as the precious metals markets.   

Donald is also an instructor for the Canadian Securities Institute (CSI). He is often called upon to design technical analysis training programs and to provide teaching to industry professionals on technical analysis at many of Canada's leading brokerage firms.  He is a respected specialist in the area of intermarket and cycle analysis and a frequent speaker at investment conferences.

Mr. Dony is a member of the Canadian Society of Technical Analysts (CSTA) and the International Federation of Technical Analysts (IFTA).

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