What do Declining Commodities Suggest for Stocks?

We're hearing all kinds of more positive economic news, but as we look at our wide assortment of benchmark stocks, we see a lot of the economically-sensitive stocks (i.e. Industrials and Materials sector stocks), not participating in the recent strong stock market.  We're also seeing commodities in general assuming a fairly mundane to weak pattern.  Let's take a look at the recent action of two of these commodities, starting with oil below.

If we see the price of oil move under that consolidation pattern, it would be a strong indication that the distorted price of commodities - since 2004-2007 - has been broken.  It is hard to remember, but it was only 10 years ago that the price of oil was ranging from $28 to $30 a barrel.  Since the US production of oil has soared, this is certainly helping to normalize that new demand from the emerging international market that was being considered so negatively.

Next, with all the good news on housing, we have seen a surprising drop in the price of lumber.

This is only bringing it back to that price range that existed before the big surge in prices earlier this year, but the sharpness of the decline is very unusual.

We'll continue to keep an eye on these commodities and their price movements, especially in relation to the stock sectors, as further developments occur.

Don Hays

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