Is the Shanghai Market Predicting a Reversal in Commodities?

Wheat and other commodities have risen parabolically recently, an indication of a blow-off top in the making. Blow-offs are followed by severe drops. Is the blow-off top at hand? 

David Rosenberg noticed how the Shanghai stock exchange is a four-month leading indicator of commodity prices. The logic would be a variant on the old saw that stocks predict recessions by six months: that China is such a factor in real demand for commodities, a slackening of Chinese purchases will drive prices down, and the Shanghai stock exchange is a leading indicator of a coming slackening of real demand.  

 

SeekingAlpha revisits this correlation since we are now four-months after the latest fall in the Shanghai index. Are commodities about to follow?

Copper is the canary in the commodity coal mine - very sensitive to changes in real demand. Copper came to life in mid-June, in effect signaling that the Flash Crash was more likely a correction not a change of trend. The canary, however, is beginning to show signs of asthma - copper has reversed to down again; and instead of recovering from the Flash Crash we had several sideways months. 

During the period of the recent commodities bubblet, the USD fell fairly hard. The USD has now reversed, and very sharply, in sync with the drop in stocks. It may be my Aug4 turn date marks a major turn across all markets, with commodities shortly to fall hard. 

Comments

[Hockthefarm]

Yelnick:

These percentages seem a bit high to me:

"According to Wikipedia a stock market crash has always been preceded by a Hindenburg Omen and stocks are generally down in the following months:

“Looking back at historical data, the probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen was 77%, and usually takes place within the next forty-days.

The probability of a panic sellout was 41% and the probability of a major stock market crash was 24%.

However, the occurrence of a confirmed Hindenburg Omen does not necessarily mean that the stock market will go down, although every NYSE crash since 1985 has been preceded by a Hindenburg Omen.”

By the way, Dent really nailed the GDP numbers. He was the only one I read that was really calling for such a bad number.

Hock

[LOL]

419 week cycle dating back to 1930 hits Sept. 3, 2010

http://www.marketwatch.com/story/crash-of-2008-winner-calls-major-top-2010-08-09

[LOL]

Chart for Sep 3, 2010

test

[LOL]

September 3 last quarter Moon will be in a negative 90 degree square formation with the Cardinal Climax.

Does indeed look bearish.

(Disclaimer: Do not use this as investment advice, for entertainment purposes only.)

[Michael]

Yelnick,

Once again, we find David Rosenberg "fitting" data to his Perma-Bear bias. This is no surprise given that the man has been absolutely HORRIBLE in his ability to forecast the stock market over the past year or so. Again, why is it so difficult for someone to post the statistical correlation coefficient between the CRB Index, and that of the Shanghai Index?

As for Copper, its currently trading above the 20-day MA at $3.25 and has rallied over 15% since July 1st. In fact, at the highs of the move, Copper was trading +20% from the low of July 1st. If the Economy is "tanking" as you and other Bears suggest, why is Copper holding its gains and trading up where it is?

Highlighting David Rosenberg and his analysis is almost comical. He's an Economist (formerly of Merrill Lynch) that is now an economist at Gluskin-Sheff in Canada.

He has NO IDEA why the market is trading as high as it is relative to all of the bearish ECONOMIC data that he presents. Like Prechter, he's been wrong for over 12 straight months.

Rosenberg is yet another person that couldn't trade his way out of a "paper-bag". Why?

Because he makes a huge mistake in thinking that equity prices are highly correlated with the economy.

Good luck with that assumption.

[Trader 123]

If I had $5 for every time someone on CNBC said the word "deflation" this week, I'd have enough for my mortgage payment.

[Hank Wernicki]

For Monday :

Be Careful

Hank

[Les]

Copper is actually tracking the US market closer than the Shanghai market. They're both down 4% from the August high.

[Sherman "double long" McCoy]

While Michael is spot on in is assertion on Rosenberg, I think we all have to be wary when crude oil starts falling out of what is now clearly an A-B-C correction upwards. Even if its just the second leg in a larger correction, it's enough to have me go to the sidelines in everything but fertilizer stocks.

[Frank]

Yes, be VERY careful Monday. If this market goes up, a lot of shorts could get hurt. If, on the other hand, it drops hard, the longs will wish they had been short or, at least, not been long.

[vipul garg]

DG,
had some queries on your 't-l'method.
whenever it is feasible , let me know, i ll post them on your blog

[Nero]

I green was black and yellow was blue, I'd have boogers on my shoe.

[greg]

CAUTION! MONDAY ALERT!

ADVISORY: MONDAY MIGHT BE A VERY NEUTRAL DAY. DO NOT BUY PUTS OR CALLS HOPING TO CASH IN ON MONDAY UNLESS YOU ARE WILLING TO TAKE ON SIGNIFICANT RISK. CONVERSELY, DO NOT PLAN TO SELL PUTS OR CALLS HOPING TO CASH IN ON STRONG VOLATILITY AS THERE MIGHT NOT BE MUCH VOLATILITY.

[Michael]

A down Monday on the Nasdaq will trigger the Titanic Syndrome. 5 down days in a row off the top with new lows exceeding new highs on each day. New highs below 20. New lows above 100. Expect a sharp snapback on Tuesday and Wednesday before the follow-through capitulation on the Titanic signal.

[ROLF]

CAUTION! MONDAY ALERT!

Bull flag on VIX. Target is 60 on a break of 28.

[DG]

Hey vipul,

Today's a good day to post them. I saw your post from yesterday and was planning to reply today.

[Chabazite]

For Monday : Be Careful - Hank
------------------------------
Thanks Hank. I will! Chab.

[yelnick]

Hock, McHugh put out a good study on the Hindenberg in 2005, and it says two Omens in rapid succession have a very high predictive rate. One does not. Watch for the second one

[betterdays]

up week after Monday low..sweet short trade coming end of the week
Yelnick .we are in a slow motion depression ..look out folks

[JT]

Not many posts anymore here on the blog. Have all of the kids packed up and left for college already?

[Account Deleted]

JT:

Most bears have been ruined financially and emotionally by this market, which simply refused to go down, to say the least. The fact they are no longer celebrating this drop and calling for P3 on this board is a sign of bear capitulation.

If I were a bull, I would be very worried as you don't want to see bears disappear if you want to see a rising market. At some point, this market will go up or down big time, but smart bulls will want to see some bears sticking around to feel good.

[Michael]

Most bears have been gone for a long time. The Feds telegraphed their moves last spring with QE and restrictions on short sales, commodity etfs, leveraged short funds.

[trendlines]

S&P500 Very Short Term: Support at 1070
This move down since the trendline break, has all the looks of an impulsive decline, and may be the beginning of a wave C or 3 down. Meanwhile, Shanghai Composite seems to have put in a medium-term bottom last month. As proposed in a post earlier this year, Shanghai leads SPX by 3-4 months. This could mean a medium-term bottom in SPX may be due only around end-September or October. This is pure speculation of course, as correlations only last as long as they last!

Very short-term, support for a technical rebound may be found around 1070 on the SPX, based on the rising trendline(green) as shown on the chart

http://trendlines618.blogspot.com/2010/08/s-very-short-term-support-at-1070.html

[JT]

"If I were a bull, I would be very worried as you don't want to see bears disappear if you want to see a rising market. At some point, this market will go up or down big time, but smart bulls will want to see some bears sticking around to feel good." - Jing

I wouldn't worry too much about a lack of bears . . . There are plenty of kids over at other Elliott Wave blogs that continue to salivate over Arch Crawford's "Cardinal Climax", the "Death Cross" and the "Hindenberg Omen".

The negative sentiment on this blog, as well as others is so thick that you can cut it with a knife.

So much talk about "Bubbles" and "Barry Obama", but no real discussion about making money trading off of what the market is telling us.

:)

[JT]

"Most bears have been gone for a long time. The Feds telegraphed their moves last spring with QE and restrictions on short sales, commodity etfs, leveraged short funds." - Michael

You have no idea what you are talking about. There are plenty of Bears out there. Currently, there are 13.69 billion shares sold short on the NYSE and 7.34 billion shares sold short on the Nasdaq.

[High Level Crouton]

I seem to remember hearing that short interest has been high before crashes.

[Rolf]

You have no idea what you are talking about. There are plenty of Bears out there. Currently, there are 13.69 billion shares sold short on the NYSE and 7.34 billion shares sold short on the Nasdaq.

JT, there you go again.Is your MOMMA callin'.

http://zmarter.com/finances-opinions/nyse-short-interest-lowest-since-january-as-selloff-buffer-disappears.html

[JT]

Rolfe,

Feel free to check out all of the blogs like Daneric, Kenny, Binve, Shanky, as well as this one here and let me know how many Bulls you find.

LOL!

[JT]

"This move down since the trendline break, has all the looks of an impulsive decline, and may be the beginning of a wave C or 3 down.

Hear that Rolfe and DG???
Yet another blogger that sees an IMPULSIVE decline.
Shocker.

[Michael]

Who cares how many people post on blogs? How many of them actually trade? I've lost count the number of times I've read "bears" posting on Zero Hedge, EW, and other bearish sites who admitted that they've been in cash for years. They're permanently traumatized. They no longer have any bearing on the market.

[Hockthefarm]

Thanks Yelnick:

Here are some HO's charted back to the 60's. The dates on one of the charts appears wrong:

http://www.amateur-investor.net/Weekend_Market_Analysis_August_14_10.htm

Hock

[Hockthefarm]

Good summary of what's on tap for next week:

http://pragcap.com/whats-on-tap-64

Hock

[Account Deleted]

Michael, JT:

I found the following ECRI professional reports excerpts interesting, as they have long-term leading indicators that even lead the stock market. I am thinking this can potentially act as a separate indicator to confirm technical analysis, as it is almost completely independent of stock prices.

Any comments gentlmen?

http://www.businesscycle.com/

April 2010 “There is no doubt that USLLI growth is in a post-recession cyclical downturn… (O)ur forecast of a growth rate cycle downturn by mid-year remains fully intact. With the markets growing increasingly confident about a sustained acceleration in U.S. economic growth in the coming months, this highlights a potential divergence between ECRI’s outlook and growing market optimism.”

May 2010 “The risk of a cyclical downturn in stock prices has risen significantly. Moreover, we are approaching the most dangerous period of the business cycle to employ a buy-on-dips strategy.”

[Account Deleted]

Dow Jones Futures before opening bell
http://niftychartsandpatterns.blogspot.com/2010/08/dow-jones-futures-before-opening-bell_16.html

[Hockthefarm]

This is really the Dent message with examples:

http://online.wsj.com/article/SB10001424052748703321004575427881929070948.html?mod=WSJ_hpp_LEFTWhatsNewsCollection

Hopefully the incontinent Obama spending will be enough to scare the daylights out of a whole generation of people and compound this issue ten fold.

Hock

[Wave]

Hock,

You act as if Govt. Spending was a disease that only the Obama Administration had exclusive rights to. Did the National Debt not surge by $5 TRILLION and increase nearly 100% under eight years of George Bush and a Congress that for the majority of years was controlled by the GOP majority?

[nspolar]

Wave, et al:

Yes the finger pointing as to why we seem to be where are at is interesting, w/r to the financial situation.

I can remember when David Stockman was Reagan's budget czar, and when he left (voluntarily or otherwise). I can also well remember reading some of his stuff in The Atlantic, a long long time ago. I thought it was good stuff.

David's present view as to who is responsible for the present situation does not I am sure sit well with the GOP.

Two good reads, take your pick.

http://www.nytimes.com/2010/08/01/opinion/01stockman.html

http://www.marketwatch.com/story/reagan-insider-gop-destroyed-us-economy-2010-08-10

My view ... well I will only say that I wish 'some party' would have held to their beliefs more dearly than they have.

ns

[yelnick]

Hick, thanks for the Hindenburg history chart. I must say that while I find head & shoulders / hindenburg omens / bradley turn dates and similar intellectual interesting, I do not find them that useful in making real decisions. I am still exploring how chaos theory and bifurcation points can give better guidance. We had a clear 'plateau' around the turn of the month, that we have bifurcated below, and are now in a new plateau which could still break either way. We have not yet bifurcated the big sideways move from May25 to Aug11.