Bloomberg Commodity Index vs. the S&P500 (spread position indicated)

In recent reports we’ve shown that gold has gained more than the S&P500 and other developed market stock indices since the beginning of trading in 2016. Subtle but steady outperformance by gold. No headlines though, and that’s best at this early phase of the asset class transition. You don’t want everybody jumping on. They’ll chase the trend later.

In our experience commodities generally lag gold’s trend turns. Commodities certainly lagged on the upside in the great commodity bull market from 1977 to 1980. Gold bottomed in August 1976 while the CRB Index made its final meaningful low over a year later, only then joining gold in a massive commodity bull (while stock indices languished until 1982).

MSA has shown both the net price trend and long -term momentum of the Bloomberg Commodity Index in recent reports. While the annual momentum trend of that asset category woke up late in 2016, it now looks poised to tack on upside that might actually get analyst, investor, and—dare we say—central bank attention.

But, more importantly, commodities now also look poised to outperform stocks. Here we show the Bloomberg Commodity Index (BCOM) weekly spread readings vs. the S&P500 as well as a long-term momentum chart of those readings. The spread has stabilized and bounced since its late June low. Its long-term momentum chart has now broken out over a parallel channel that traces back to mid-2016.

This technical action argues it’s time to view commodities as an emergent outperformer to the S&P500. And remember, by measuring BCOM vs. the S&P500 we’re measuring commodities against the strongest broad stock index in the developed economies.

For those eager to capture a top in the stock market (U.S.), we suggest they consider another approach. Any first decline by the stock market will be modest (not like 1987) and probably reserved for 2018. This we have argued. Such laborious, twisty-turny tops occurred in 2000 and 2007. Distributive zones of zigzagging action that teased both sides, yet were destined (based on annual momentum) to resolve on the downside, as both did.

At this point in the grand transition we suggest considering U.S. stocks as an aged beneficiary of the Fed’s explicit policy to artificially price stocks to the upside for some presumed public sentiment outcome. The upward pricing happened, but not the public sentiment. And during that time, 2011 to 2016, commodities dropped on a net and relative performance basis. A big time shift disfavoring commodities (an outcome MSA reports argued beginning in late 2011). This drop followed a decade of vast outperformance by commodities relative to stocks.

But now the tables have turned again. And maybe the best approach is to view this as an artificially overpriced asset category (U.S. stocks) and an undervalued asset category (commodities), and put them together as a spread. Short S&P500, not as a net short, but as a short against a comparable long position in commodities (the Bloomberg Commodity Index has a few liquid ETFs that reflect it).

A large investment sandwich. A position that does not peg you the asset manager or investor to each and every uptick or downtick in the respective halves, but in the change in the relationship between the overvalued half vs. the undervalued half.

Great concept. But what’s needed first is a technical signal that it’s now appropriate to view the relationship that way.