Commodities Vs. Equities: The Battle Continues

If the markets seem a more than little indecisive at the moment, one of the reasons is that ongoing sector rotation has muddied the waters with respect to what is hot and what is not. A lot of the sector rotation churning, on the other hand, is merely asset class trickle-down, as investors try to decide at a much higher level whether they want to make a substantial commitment to equities and the possibility of a resumption in the recent bull market – or whether the hard assets of commodities are a more attractive option in light of natural resource shortages and concerns about inflation.

The commodities vs. equities battle has been tilting in the direction of commodities in recent months, but since the March lows the consensus has unraveled. In the chart below (click to enlarge), the ratio is of the Rogers International Commodity Total Return Index (RJI) to the SPX. [RJI is an ETF linked to the Rogers International Commodities Index that has a broad weighting, with less emphasis on energy than most commodity indices.] The ratio chart shows indecision over the past six weeks, with the symmetrical triangle pattern awaiting resolution. I am not sure which side will win the commodities vs. equities skirmish, but when we can declare a victor in this battle, we should know a great deal about the future of the markets over the next few months.

For a longer-term perspective on this subject, see my Equities or Commodities? post of a month ago.

Comments

[bearfund:]

This battle can continue for a long, long time with no clear victor. It's happened in the past; even in the supercycle phase favouring hard assets, periods lasting months or even years have been seen with no obvious winner. Given that most commodities are priced in US dollars, I'd bet on them, because I'm a dollar investor. If I were a euro investor or a yen investor or God forbid a krona investor, I wouldn't know what to do; equities look risky and my home currency would look short-term overpriced, but commodities risk being a long grind to nowhere. Probably I'd be thankful that my central bank is still encouraging banks to pay interest and putting at least 1/3 of my money into fixed-income. If I wanted a trade, I'd short the dollar rally and buy oil on dips. Oil is useful. Dollars aren't. In the long run, that's going to win out.

2008 May 07 12:54 AM

[Harold Weis...:]

I am still playing defense with my investments. I am even scoring a few points. It is boring but I'll be back to play another day. Never having to hear the fat lady sing is worth suffering a little boredom.

One of the old-timers who helped me learn about the market said that trading is like hunting bears - sometimes you get the bear and sometimes the bear gets you. He let me figure it out on my own that when the bear gets you, it is the last hunt. Forever.
Owly

2008 May 07 09:26 AM

[surgcare:]

Commodities are going up bcause theres a shortage of most elements such as oil and an insatiable appetite for other commodities such as iron ore etc . If the demand and use of commodities is high now ,what will happen if and or when the US economy recovers . I vote commodities .

2008 May 07 04:54 PM