Western Producer reporter Ed White is talking to the world’s top market analysts to bring a range of philosophies and insights into the current financial crisis. In this series, the analysts discuss what happened to predictions about the world being in a long-term bull market for commodities and whether the financial crisis changes the long-term outlook for commodities farmers produce. This is the fourth in the series.
During normal times the financial press is filled with market analysis from big names at big banks and brokerage companies. But when dramatic events occur in world markets, such as the present crash and volatility, a light is shone on some of the lesser-known analysts who toil away in obscurity, especially when they appear to be right, or lucky, about calling what has occurred. Tim Wood of Alabama is a specialist in Dow theory and market cycles analysis. He came as close as anyone to calling the July peak and subsequent fall of commodity prices. He publishes the Cycles News and Views newsletter.
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Q: Why did you begin warning people in February that it looked like a big top might be forming in commodities by August or before?
A: I wanted to give people ample warning. I didn’t want to give it to them after the fact. I wanted them to see what could be developing.
Q: What was it you noticed?
A: It was a statistic stating that if the three-year cycle in the CRB (Commodities Research Bureau commodity price index) topped in 19 months or less, that was a DNA marker of a major top in commodities . . . I saw that it was a parabolic advance and that we were moving into a long-term top in commodities.
Q: Since then commodity prices have tumbled. Where, in technical terms, are we, and where are we going?
A: We have broken below the previous three-year cycle low, which tells me that that statistic has come to pass. There have been four other occurrences in which the three-year cycle has topped in 19 months or less. All of them led to a major top in commodities and now we have moved below the previous three-year cycle low, which tells me we have something in the cycles world called a left-translated three-year cycle, which basically means the outlook is very bearish for commodities.
Q: How bearish?
A: We’re going to drift lower. That’s a typical sign of a major top. It’s not that we won’t have convincing bounces on the way down to reignite the bullishness, but I think that we’re going to go down for the remainder of this three-year cycle, which is a couple of years.
Q: What happens then? Is there a chance for a substantial recovery?
A: Yes. Once you get a new three-year cycle low, then the process starts over again and that’s the opportunity for a new cycle-up to begin. But for now the die is pretty well cast, and it’s negative.
Q: What do we learn from the example of sugar, an agricultural commodity, between 1968 and 1975, when it went from 1.3 cents per pound to 66 cents per lb., to eight cents by 1975. At its peak sugar had risen by 4,900 percent, but then tumbled.
A: I think it teaches us that people are most bullish at the top, and the more the price advances, the more bullish they become. All these fundamental reasons appear to explain why it’s still going to go higher. We heard the same thing about oil this year. We heard the same thing about gold. I think those are just signs of a top, in which prices have gone into a parabolic advance, and it teaches us that it was a trap. It shows us how much of a manic bubble commodities can become.
Q: From your years of watching commodities and markets, is there anything different about agricultural commodities?
A: Every market will have its own characteristics, and there’s a different cyclical ebb and flow in every market, but from a technician’s point of view there’s not a lot of difference because price is price and it doesn’t matter what it is representing, whether it’s pork bellies or zinc.
Q: A lot of people have argued in recent years that we are in the midst of a long-term commodities bull market. What do you think of that argument and does it still hold water?
A: At least so far it has been killed. It’s just like the things that were written about the sugar bubble. I think that’s the kind of things you hear near a top. As you get near a bottom, you’re going to hear very, very bearish things.
That’s just human nature. I really discount what I hear and go by charts and statistics. When oil was at $147 a barrel and we were hearing people call for $200, I came out with an intermediate term sell signal based on some of my indicators.
And you wouldn’t believe the hate mail I got. I was nervous as hell making that call, but the technician looks at price and tries to remove that emotion.
What we’re hearing is a lot of emotion, passion, about commodities, and I take it all with a grain of salt.
