AVANTI GROUP REVIEWS

http://www.istockanalyst.com/finance/story/6323739/commodities-issue-warning-shot-for-economy-stock-market

AVANTI GROUP REVIEWS

It's time for an update on commodity prices.

As I have written before, consumers understandably like to see prices for commodities decline, the more the merrier, particularly gasoline and energy costs.

Many fundamental analysts also take commodity price declines as a positive for the economy, on the theory that consumers will have more spending money in their pockets, and manufacturers will have lower costs, so hopefully greater earnings.

Investors tend to also take declining commodity prices as a positive for the stock market on the same reasoning.

Unfortunately, history doesn't confirm the optimism.

As a five-year chart of the CRB Index of Commodity Prices shows, declining commodity prices usually indicate demand for goods is dropping and the economy will soon be in trouble, which in turn is a problem for the stock market.

For instance, the CRB Index of Commodity Prices plunged 57%, from 470 to 200 in 2008-2009. Good for the economy and stock market? Not hardly. The severe 2008-2009 ‘great recession' and severe bear market in stocks accompanied the decline in commodity prices, and saw the S&P 500 also plunge 57%.

Before the economy slowed in the summer of 2010, and the stock market experienced the double-digit decline that summer, commodity prices had rolled over to the downside again.

And before the economy began to slow again in the summer of 2011, and the S&P 500 experienced a 19% decline that summer, commodity prices began to decline again.

Now, after only a brief recovery last year, the CRB Index of Commodity Prices has been back to the downside since last fall in spite of the economic recovery being back on track after last summer's stumble, and in spite of the stock market being in a significant ‘favorable season' rally.

So another reason to enjoy the favorable season rally while it lasts, but to remain alert to the technical indicators on commodities as well as the stock market.

AVANTI GROUP REVIEWS