Did the Commodity Bull Die?
Friday, September 15, 2006 | Teeka TiwariRating:
Much of the fear premium appears to be draining from the world’s commodity markets. Gold is plummeting, oil has collapsed, and suddenly the world appears to be a less scary place to the global investment community. So what does this all mean?
It means over the short to intermediate term energy and commodities will take a pause here, but ultimately it’s the pause that refreshes.
Cheaper energy prices act like a global tax cut and ultimately lengthen the overall growth cycle. Long-term bull markets frequently go through intermediate consolidation periods; in the last equity bull market we saw such periods in 1987, 1989, 1991, 1994-1995 and 1998. Each of these consolidation periods was proclaimed to be the end of the bull market, and obviously, hindsight proves that they were not.
These consolidation periods are painful to go through, and they try the patience of any investor but that doesn’t change the fact that they are a necessary evil. These “reload” periods are necessary in order to sustain long-term bull moves.
Short to intermediate term energy is going to have a tough go of it, period. There will be plenty of trading rallies to play, but we will need to see the group consolidate before it makes its next meaningful move higher.
The good news is that oils 15% slide will, in all likelihood, prevent the US economy from slipping into recession. Money that was being locked away under the Arabian desert never to be seen again will now start re-circulating through the world’s consumer economies.
The world uses approximately 88 mm barrels of oil a day. Oil’s recent slide translates to over $1.3 billion dollars a day being pumped back into the global economy. That’s money that will be spent and re-spent by everyday consumers. This means that energy inflation pressures will abate, and the Fed can, at a minimum, continue pausing.
The take-away from this is that oil getting hammered is occurring at the absolute perfect time in the cycle and ultimately will lengthen the overall cycle of global growth and the commodity bull market.
Remember that commodity demand is being fueled by the growing middle classes of China & India. China and India’s economies are heavily dependent on US imports. A US recession deals a serious blow to the commodity story, whereas a US slowdown builds the base for continued global economic expansion without the specter of rampant inflation and an overzealous Fed over our heads.
And while September and October are usually unpleasant stock market months, they create incredible trading opportunities that lead us to the November thru March period which is just an absolutely terrific time to make money in the stock market.
So my call here is to play the short-term trading ranges, get ready to buy big if we get an ugly 1987 moment in either September or October and be prepared, because once the Street feels that the Fed is done, this market will rip much, much higher.
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Teeka Tiwari
Chief Investment Officer
ETF Master Trader
