It does not appear obvious, but a rally that could potentially be the last in this cyclical bull seems to be building. Yes, I know everything looks pretty bleak, but rallies in a cyclical bull surprise on the upside, and with the fairly large build up in short positions, this market could force many of the shorts to run for cover.
As we examine the chart activity of the CRB Index and the 10 year Treasury, there is enough evidence there to assume one or both could provide the catalyst for another significant rally. Let's take a closer look.
CRB Index:
For many years there has been a historical inverse relationship between the CRB, or commodities index, and stocks. In other words, when commodities rise, stocks fall. In recent months we have witnessed a dramatic rise in commodity prices, and only a mild reaction to the downside in stocks.- See Chart
Jim Rogers believes that commodities have entered a new bull market after going through a bear market for better than 20 years. We have heard several cries from the crowd that commodities are now in a speculative bubble that could burst at any time.
Rogers believes that commodity have entered a new bull market which could last 10-20 years. He also said to expect nasty corrections along the way. It is the nasty correction in commodities that could lure investors into a false sense of security, and provide the catalyst for an 8-12% rally.
I say "lure" because I believe that any correction in commodities will be looked at as something permanent. Don't be fooled. Any decline in commodities and the CRB Index will be nothing more than a correction within a bull market. Any corrections in the days and weeks ahead could provide a nice springboard for stocks. In fact, we believe this will be one of two major factors that could carry the S&P back to 1300 or slightly higher.
Since we believe the bull market in commodities is just getting started, we would be buyers of commodity related stocks on sharp declines.
The second catalyst for a stock market rally is falling bond yields.
As commodity prices begin to pull back, inflationary pressures will begin subside, and the fed will no longer have to raise rates. In the weeks ahead we will begin to hear talk of a slowing economy, and this will cause a rally in the bond market.
I believe that locking in high-quality corporate bonds and 1- 2 year cd's is a prudent move. As I was scanning my cd list today I found something unusual on the list. Cd's with 3 year maturities, and yielding 5.5% or more, are now carrying call dates. This tells me that the banks believe that interest rates are going to decline in the months ahead.
For income investors, I would look to ladder maturities in corporate bonds and cd's starting at 6 months, and going out 5 years. Buy your bonds in 3, 6, 9, and 12 month increments for years 1-5.
For your equity investments, hold a larger than normal position in cash to take advantage of a market decline once investors realize that the pullback in the CRB was only temporary.
