Since June of 2010, commodities have been on the tear and the recent sell off attest to the Stein dictum that “If something cannot go on forever, it will stop”.
By looking at the CRB Index chart, one is inclined to think that the commodities have more room to drop, at least down to circa 382 level but, one never knows, the 300 level is the long term support since March 09 lows and why stop there even.
No one builds up [copper] inventory at a time of super-high prices in any commodity… And, as also with copper, there is a strong suggestion that this metal [zinc] was only “imported” in the first place as a financing vehicle.
What this suggests is that we have copper de-collateralization going on in China: contrary to standard supply-demand norms, supply of the metal in China rose in tandem with the price, was stocked in bonded houses in Shanghai, so that it can be used as collateral for loans… and now that is unwinding.
But as the commodities end-users are standing on the sidelines depleting their inventory at some point they may have to step in and replenish it.
De-stocking and thrifting by first-stage users are both finite phenomena. Both must end sooner or later… The problem is one of timing. Take copper, for example… There are already plenty of signals that metal availability within China is tightening… All of which should translate into greater need for imported metal. But only after the bonded stocks mountain has been reduced to something closer to “normal” levels.
Another market-noteworthy price pattern is developing among the rail stocks with major ones like UNP, CSX and even KSU, completing the second major round loop that suspiciously looks like a set up for retesting of their 200 DMA which is substantially below. CSX has even carved up the inverted head and shoulder with $80 a possible neckline although the last shoulder is in process of being carved up.
In a nice article, Zacks.com says that they are neutral on these names in the medium term.
But, given that the rails have been foreshadowing the market as of late, watching what they do – while commodities clear up their price via speculators and the demand – may hint us as to the direction of the market: if rails fail to follow the commodities we just may postpone the major sell-off many are awaiting.