Commodities investors have
faced major psychological trials over the past several quarters or so. Back in early May the flagship CRB
commodities index hit an all-time nominal
high, but then it started grinding lower into the summer. Not long after it plummeted, crashing
through its key support zones like a meteor.
In August and September,
the plunging CRB led to a widespread perception that commodities in general
were falling off a cliff. Some,
like the perpetual commodities bears on Wall Street, rejoiced. To them the utter technical failure in
the CRB was prime evidence that this pesky commodities bull that has been
competing with their mainstream stocks for capital was finally finished. They were smug in their apparent triumph.
To others including many
long-time commodities bulls, the technical devastation in the CRB wrought proportional
psychological devastation. For
every investor there comes some inflection point when prices have fallen so
far technically that they overshadow any bullish fundamentals. Eventually everyone has to cut their
losses if a damaging price cascade lower continues unabated. There is simply no other rational
And there is nothing that
breeds negative psychology faster than falling prices, so it is not
surprising that bearish theories on commodities have flourished in the last
six months or so. It is just
human nature to want to understand why events are happening around us. We are all the most receptive to
theories that explain and justify whatever happens to be transpiring at the
moment in our own immediate environments.
A key case-in-point is
global warming. Regardless of
whether these theories are true or false, they only gain traction among the
general populace during unusually warm conditions like this past winter. There is no doubt that if our winter
had instead been anomalously cold and bitter, barely anyone would have been
talking about global warming. This
innate psychological need for explanation intimately affects the markets as
When prices are rising
fast, bullish theories abound to explain them. Remember all the New Era bullish
theories surrounding the NASDAQ in late 1999 and early 2000? And when prices are falling fast,
bearish theories gain traction and prominence. If the CRB had been strong rather than
weak over the last six months, almost none of the bearish theories so popular
today would even exist. Prices drive explanations.
Well, believe it or not,
the CRB actually really was strong
over the last six months! All the
bearish theories based on the cratering CRB are
founded on nothing more than an illusion. Every single bearish theory you’ve
heard lately that draws strength and credibility from the falling CRB is
simply not valid. An epic
misunderstanding, or deception depending on your perspective, has just taken
place. The CRB is not as it
If you have been following
my research thread on this, you know exactly what I am talking about. I wrote essays about this critical
issue in October and January and have
discussed it in our newsletters. I
believe it is extremely important to properly understand because the
crumbling CRB is the foundation of countless bearish theories, and if the CRB
is not really falling apart then these theories are instantly rendered void.
In a nutshell if this is
new to you, the composition and calculation methodology of the venerable CRB
commodities index radically changed in July
2005. The equal weighting of
components and geometric averaging of prices that had defined the CRB for its
first 48 years of existence were thrown out the window. An entirely new never-before-seen
beast was created. A couple weeks
ago I wrote an essay with much more detail on this if you need some background. Today’s essay assumes you have
read this earlier one.
Oil and two of its refined
products now account for one-third of the weight of this new CRB revision,
the tenth in its storied history.
So the index widely known as the CRB today is the radically different
tenth revision, or CRBr10. When
the anomalously warm winter eroded oil demand across most of the northern
hemisphere, oil had no choice but to correct aggressively. Of course the CRBr10, effectively 33%
weighted in oil, fell in sympathy.
When the CRBr10 bled with
oil, it broke a crucial years-old secular support line as well as the
index’s 200-day moving average.
My controversial contention was that the CRBr10 breakdown was not an indication of a general
commodities problem, but merely of a new oil-dominated CRB being led by the
nose by a brutal oil correction. The
trouble lied in proving this thesis as reconstructing the old ninth-revision
CRB, or CRBr9, would be extremely difficult as I explained a couple weeks
ago. But if it could be done I
“So I would love to see what the ninth CRB
revision would look like extended to today. I hope someone out there can build
it. I know this for sure, the CRB
breakdown would either be vastly smaller, a minor
dip under its long-term support, or it would not exist at all.”
Well, it turns out I was
not only right, but I was actually seriously understating the bullish case for the historical CRBr9 extended
to today! As a student of the
markets I am always seeking new knowledge. One of the great benefits for me of
sharing my research in these essays is people far wiser than myself graciously write in
and help me better understand issues I am grappling with. Their insightful feedback helps hone
my knowledge, just like the famous Proverbs verse says… “As iron
sharpens iron, so one man sharpens another.”
After my last essay on the
CRB two weeks ago, a handful of folks wrote in and set me straight on the
CRBr9. I was trying to figure out
how to reconstruct it, but they let me know that it still exists as a futures contract! The answer to comparing the CRBr9 to
the current CRBr10 was far easier and more elegant than I had dared to
hope. If you were one of the
people who wrote in to help me with this issue, thank you so much. You have my deep gratitude for your
time and wisdom.
So all I needed to do to
test my controversial theory that the bears hate and ridicule was to secure
some CRBr9 data. This is
available in a NYBOT-traded futures contract known as the Continuous
Commodity Index, or CCI. The
NYBOT describes its neat product as “The Continuous Commodity Index
(CCI), represents the ninth revision (as of 1995) of the original Commodity
Research Bureau (CRB) Index.”
I felt like a kid on
Christmas morning when I was told about the CCI and then secured the
data. Now all I had to do to
compare what has happened in the CRBr10 to what would have happened in the
CRBr9 without the tenth revision was to chart both series. After you digest these charts, you
will agree that all bearish theories based on a secular CRB breakdown are garbage. The difference is that striking! This commodities bull is very much
alive and well.
In these charts, the CRBr9
that made the secular trend in question is charted in blue. The accompanying moving-average and
standard-deviation technical lines apply to it alone. Starting just before the actual tenth
revision began trading in early July 2005, today’s CRB (the CRBr10) is
charted in red. This chart is
like cool, fresh, pure water to the parched throat of a traveler
who has been wandering for months in a scorching desert!
It is best to start at the
beginning. The CRB hit its brutal
multi-decade bear-market bottom in late 2001 and then started gradually
climbing. Over the subsequent
five years or so it carved one of the most beautiful and tight secular uptrends that you will ever see. The geometric averaging inherent in
the CRB really smoothed it and contributed to a precise uptrend within
very-well-defined support and resistance lines.
This uptrend was without a
doubt the most important technical
foundation underlying the perception of
a general commodities bull market.
Every time commodities corrected prior to Q3 2006, investors would
look at the CRB with hope and trepidation. If the CRB held above its secular
support and/or 200-day moving average, then all was well as the commodities
bull remained intact technically.
A decisive break in this critical support would be devastating for sentiment,
and that is indeed just what happened.
In July 2005 the brand-new red
CRBr10 line became known as “the CRB”. Almost all technical analysts,
including me I am embarrassed to admit, just grafted it on to the old CRBr9
data. Most analysts were not
aware of the radical tenth CRB revision so they considered the CRB continuous
and comparable out of ignorance. Some,
like me, were well aware of it but didn’t yet know of a viable CRBr10
alternative. And I suspect a few,
probably Wall Streeters, knew about the CCI yet
deviously still ignored it in favor of the CRBr10
since it supported their perpetually bearish case for commodities.
So after this tenth
revision, the new CRBr10, grafted onto the old CRBr9, continued along higher
within the CRBr9’s well-established secular uptrend. The CRBr10 was entirely different and
not comparable, but due to rising oil prices in 2005 and early 2006 it
continued along in its predecessor’s path out of pure coincidence. Then in Q3 of last year the CRB
suddenly broke down with a vengeance.
Its secular support failed, its 200dma failed, and there was great
wailing and gnashing of teeth leading to flourishing bearish theories.
The critical problem here
was that it was the CRBr10 that had broken down, the new oil-dominated one,
not the traditional CRB that had originally made the uptrend in question in
the first place. If the same
ninth-revision CRB is charted up to today, which is now known as the CCI
since July 2005, there was no
breakdown! In fact, exceeding
my wildest hopes, the CRBr9 actually broke out of its secular uptrend to the upside in early 2006 and has
traded above its old trend channel
since. This is incredibly
bullish, not bearish!
This next chart zooms into
the last couple years which set the CRB record straight once and for all. The blue line and the accompanying technicals are from the ninth-rev CRB until July 2005. After July 2005 the CCI, calculated by
the identical CRBr9 methodology and component weightings, is grafted on. Meanwhile the red line is the new
tenth-rev CRB that is unfortunately known as “the CRB”
today. By focusing on it instead
of the perfectly comparable CCI, we have all been terribly misled.
The true CRBr9 and the new
CRBr10 weren’t that different in the first quarter of the
latter’s introduction. But
ever since, they have been increasingly spreading apart and taking their own individual paths. For the second half of 2005 these
differences weren’t great, but they really started accelerating in
impact and importance in 2006. If
people considered the CCI today and not the CRBr10, commodities perceptions
would be far different from what we’ve seen over the last six months.
At the dawn of 2006 the
CRBr9 was actually breaking out above
its secular resistance line while the CRBr10 was merely in the middle of
its predecessor’s technical uptrend. The strong rally in the metals last
spring drove both CRBs up to new bull-to-date
highs, but the CRBr9’s rally was much more impressive. This true CRB we’ve all learned
to love over the years nearly broke 400.
Man I wish I had known about the CCI back then!
In the latter part of Q2
2006 both CRBs corrected, a necessary and healthy reaction after
the greedy euphoria that drove them to new highs in the weeks before. Up until Q2, the CRBr10 was not all
that different from the CRBr9 performance-wise. Yes it was already understating the
bullish technical case for commodities by languishing in a lower range, but at
least these two indexes were usually moving in the same direction. But their harmony abruptly ended in Q3.
In the middle of Q3 2006,
the headline CRB was already weakening down near the center
of its trend channel. But soon it
started to really fall with oil.
Oil itself retreated from its highs soon after the Prudhoe Bay
oilfield problems weren’t as bad as feared and traders started growing
concerned about the conspicuous absence of any hurricanes approaching the Gulf of Mexico.
On top of that, energy traders were spooked after a major hedge fund
blew up and decimated the natural-gas market as the fund’s trades were
unwound at fire-sale prices.
With such a tremendously
heavy oil weighting, the CRBr10 started freefalling. It made a valiant attempt to rally at
support, but this only lasted a week or so before it started plummeting lower
again. Since almost everyone was
not aware that the CRBr10 was not comparable to the CRBr9 that had originally
carved the breaking uptrend, technically-oriented traders started getting
really scared. In light of this erroneous
assumption that the current CRB was comparable to the past, their fear was
But in reality, just as the
CRBr10 was starting to slide with oil, the CRBr9 was actually making fresh
new all-time nominal highs! On May 11th the CCI closed at 398.56, compared
to just 365.35 on the CRB. But on
August 9th the CCI closed marginally higher at 398.87, a new high. Meanwhile the CRB had already fallen
considerably to 353.70 and it was headed a lot lower. So just when people were starting to
get worried, the true CRB was near an all-time high!
As oil dragged the new
headline CRB lower, the CCI fell too since it also has oil and heating-oil
components. But when the CRB
initially bounced at dismal deep-sub-trend lows near the end of Q3, the
ninth-rev CCI had actually just merely fallen back down to its own upper resistance. Thus in early October when bearish
theories really started to germinate in the fertile fields of fear and worry,
in reality the CRBr9 was at the very top of its trend channel in a very
bullish state. If only the CCI
had been widely known then!
In Q4 2006 the spread
between the ninth-rev CCI and tenth-rev CRB widened considerably. While the CRBr10 recovered slightly
into late November at still very-low levels technically, the CRBr9 was
actually making fresh new all-time nominal highs in the midst of the carnage! The CCI closed at 408.79 on November
30th, a whopping 27% higher than the headline CRB’s
close that day. Instead of
listening to the goofy bears, we bulls should have been dancing in the
In reality not only was
there no CRB breakdown, but the true historical CRB index was hitting new
highs despite the isolated weather-anomaly-driven weakness in oil. And we are still nowhere near a
breakdown today. As of this week,
the CCI remained a good 12% above its long-term secular support line as well
as above its 200dma. And speaking
of 200dmas, the CCI’s actually rose during
the last six months unlike the CRBr10’s which nosed over and meandered
In all my years of studying
the markets and speculating, I have never seen an index change as radically
as the CRB did in mid-2005. And
on top of that, I have never seen a situation where pretty much everyone, me
included, just kept on watching the new index as if it was comparable to the
old. The irrational behavior of the masses, even the ones trying to pay
attention, never ceases to astound.
At Zeal we strongly
suspected that the CRBr10 was not faithfully telling the story of
commodities, but we had no way to prove it until I was told about the CCI
last week. Despite this, since
the October lows we have been aggressively buying elite high-potential
commodities stocks in our newsletters to take advantage of the low prices and
rotten sentiment. Most of our new
trades since then have been gold-stock trades since we feel gold’s
young upleg has particularly exciting potential.
If you invest in or
speculate in commodities stocks, you ought to subscribe to our acclaimed monthly newsletter. In it we are always working hard to try
and understand the trends. When
the technicals seem wildly in our favor, we recommend great stocks with excellent
fundamental prospects to ride the next surge higher. The CRB confusion has created a rare
opportunity where perceptions and realities don’t match. Please join us today before this
great chance to buy vanishes.
The bottom line is the
Continuous Commodity Index, an extension of the old ninth-revision CRB’s calculation methodology, components, and
weighting, decisively shatters the false notion that there has been some
catastrophic commodities breakdown.
It is a myth. A new
never-before-seen “CRB” index was driven lower by oil, but it
wasn’t the same index that made the secular uptrend in the first place
by a long shot.
All bull markets climb an
endless wall of worries and this one is no exception. Some worries are valid, others are
not. Next time someone tries to
get you to buy into a bearish theory based on the CRB breakdown, realize that
it is utter nonsense. The true
CRB never broke down and instead broke
out to achieve new all-time highs recently. There is nothing remotely bearish
about the ninth-revision CRB’s behavior over the past six months.
Adam Hamilton, CPA
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