May 25, 2015

Although the evidence is far from conclusive, when taken together a number of price-related developments since the beginning of this year suggest that the cyclical commodity bear market has ended. I’m are referring to the extent to which prices fell during the second half of last year (the decline has the look of a final, bear-market-ending capitulation), the fact that oil is trading in line with a pattern that has marked multi-year bottoms in the past, the upward reversal in the Canadian Dollar, the turn from relative weakness to relative strength in emerging-market equities, and the strong rebounds in Russia’s stock market and currency. I’ll now zoom in on the last two of these developments.

The first of the following weekly charts compares the EEM/SPY ratio (the Emerging Markets ETF relative to the S&P500) with the CRB Index (an index comprising the prices of 17 commodities). The blue line on the top section of the chart is EEM/SPY’s 70-week MA. The EEM/SPY ratio trends in the same direction as the CRB Index and generally leads the CRB Index at major turning points, with trend reversals confirmed by EEM/SPY breaking above/below its 70-week MA.

The EEM/SPY ratio has turned upward. It hasn’t yet broken above its 70-week MA, but the reasons to expect that a reversal will be confirmed within the next few months are the extremely depressed level from which the CRB Index is rebounding and the second of the following charts.

The second chart compares the RSX/EEM ratio (Russian equities relative to Emerging-Market equities) with the CRB Index. When commodity prices are in an upward trend, Emerging-Market equities are generally strong relative to US equities and Russian equities are generally strong relative to Emerging-Market equities. In other words, Russian equities (in US$ terms) tend to be very strong on a relative basis. It works this way almost regardless of what’s happening in Russia.

The RSX/EEM ratio just had its strongest rally in more than 4 years and the rally happened in parallel with widespread pessimism about Russia’s economic prospects. This is a sign that the commodity bear market is over.



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