Martin is the Investment Strategist to the AdvisorShares Pring Turner Business Cycle ETF (DBIZ)-and since 1984, he has published the "Intermarket Review," a monthly global market report revered among analysts and market technicians. Martin shares his technical analysis on short and long-term market momentum and the potential effect for commodity prices.
Since records began in the early nineteenth century industrial commodity prices have alternated between secular bull and bear markets averaging 20-years. Sometimes, such as the post 1980 period, "bear markets" have taken the form of trading ranges, but the alternating pattern nevertheless still exists. The current secular bull began in December 2001. If 2011 marked its peak it will have been one of the shortest on record. Our work though, argues otherwise.
One indicator that we have found to be helpful in this regard is a price oscillator (trend deviation) based on the relationship between a 60- and 300-month simple moving average. Secular buy and sell signals are triggered when it crosses above and below its 48-month MA. These turning points have been flagged in the lower panel of Chart 1 with the red and green arrows. The secular model, referred to in the text, uses these signals along with a trend reversal factor as confirmation. Hence the occasional black highlighted neutral status.
Up until a couple of months ago the indicator itself had been in a declining phase and was getting pretty close to its fifth secular sell signal since the mid-nineteenth century. However, it has now started to tick up and that suggests higher prices. We would be skeptical of this small change were industrial commodity prices at the top of a primary bull market. However, long-term momentum in Chart 2 has just started to turn up. This clearly points more in the direction of a youthful bull than a tired bear.
Directional changes in the secular oscillator are quite rare. Even though the latest uptick may appear miniscule, it strongly suggests that a new up leg in the secular bull market is now underway. In this respect three of the four olive green arrows in Chart 1 show that previous mid-course trajectories were all followed by above average rallies.
Our conclusion is that this propitious conjunction of positive cyclical and secular forces, will result in a lift off for commodity prices.
Equity investors will be interested to learn that the direction of our secular commodity oscillator has a broad influence on secular trends of stocks. Actual downside reversals in this oscillator have all represented confirmation that a new secular bull market for equities was underway.
To make this concept come alive the oscillator has been plotted inversely in Chart 3 so that its movements correspond with those of deflated equity prices.
The green shaded areas show when the oscillator is in a rising mode i.e. when secular commodity price momentum is declining. Most of the time, this kind of environment is bullish for the very long-term trend of equities. The 1929-32 deflationary pocket is an obvious exception that proves equities abhor unstable commodity prices in either direction. The solid arrows point up when this inversely plotted oscillator crosses below its MA and the dashed ones when it experiences a mid-course change of direction. Both events seem to trigger a poor environment for equities. Remember the relationship is not a precise timing device. However, since the oscillator has started to decline again this clearly elevates the risk of holding equities and the likelihood of a resumption of the secular bear.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: AdvisorShares is an SEC registered RIA, which advises to actively managed exchange traded funds (Active ETFs). This article was written by Martin Pring, the portfolio manager of the AdvisorShares Pring Turner Business Cycle ETF (DBIZ). We did not receive compensation for this article, and we have no business relationship with any company whose stock is mentioned in this article. This information should not be taken as a solicitation to buy or sell any securities, including AdvisorShares Active ETFs, this information is provided for educational purposes only.
Additional disclosure: To the extent that this content includes references to securities, those references do not constitute an offer or solicitation to buy, sell or hold such security. AdvisorShares is a sponsor of actively managed exchange-traded funds (ETFs) and holds positions in all of its ETFs. This document should not be considered investment advice and the information contained within should not be relied upon in assessing whether or not to invest in any products mentioned. Investment in securities carries a high degree of risk, which may result in investors losing all of their invested capital. Please keep in mind that a company’s past financial performance, including the performance of its share price, does not guarantee future results. To learn more about the risks with actively managed ETFs visit our website AdvisorShares.com.