Assessing market strength requires diverse study

It’s easy to jump to conclusions when looking at charts.

It’s easy to do. They are visual and you can find patterns without much work.

But it can also be dangerous if seeing patterns causes you to make decisions too quickly.

What you’re seeing might not actually be there, at least not in a real-world way.

There’s an excellent example of that right now in commodity futures markets.

Look at one-year charts of new crop soybeans, corn, canola and wheat. They have all had higher lows since January, with prices trending higher. Soybeans are the weak sister of the bunch, but even their lows have been rising and highs rose as well until the start of spring.

There seems to be general crop market strength. Is that part of a general commodity market rally? If so, crop prices could really take off.

Look at crude oil futures. They’re up. And they have been rising since January, with a steady climb higher.

Some people could use that as verification of a suspicion that a general commodity market rally is underway. That could lead them to be overconfident with forward pricing, or refusing to price. Remember what happened during the commodity market rally of 2006-13?

A crop rally confirmed by a crude rally looks like a reasonable bet.

But that’s where the analysis falls apart.


Go look at copper: it’s been flat and slightly falling all 2018. Copper is often seen as a bellwether for commodity market and economic strength, since it is used in construction and housing.

If copper isn’t rising, the thesis that a general economic expansion or commodity market rally is underway doesn’t hold up very well.

I asked market analyst Darin Newsom of DTN about this, and he confirmed my suspicions.

“It comes from different areas and I don’t know if they’re actually connected,” said Newsom, skeptical of the suggestion that rising crude prices confirm widespread cross-commodity support for higher crop prices.

“It’s from two different sources and I don’t really think (crude oil and crops) are moving hand in hand.”

Crops have been helped by drought in South America damaging corn and soybean production. Crude oil has been helped by OPEC’s attempts to control output and eliminate the chronic surpluses of recent years, plus ongoing problems in Venezuela and new problems with Iran. It could all just be a coincidence, no matter how it looks on the charts.

“They are not moving in lock-step, but they are moving in the same direction.”

There’s no reason a crude oil rally couldn’t spark a cross-commodity rally. That was a big part of the 2000s rally, combined with investment money pouring into the commodity category and good economic growth.

But it’s very premature to assume such a phenomenon is occurring.

The truth is in the charts. If you look at enough, you can see there’s no general rally lifting all ships, but just specific commodities and commodity categories rising.

The danger is in looking at only a few like the crops, then comparing them to one bellwether like crude oil, and jumping to conclusions.

The charts create a complex picture and you have to look at the whole canvas before drawing conclusions.

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