Continuing from where I left off yesterday, I have had some some additional thoughts overnite about the natural resource / energy stocks. My thinking was reinforced this morning (Wednesday, August 6) by comments from Dennis Gartman on CNBC. He came on and unequivocally said the bull market in commodities is over. Now, he is a trader, and he did not frame that comment with a period of time. Later he suggested that it was over for the near term (which might be 6 months to two years for all I know). During the show, Gartman suggested that oil would not top $145 a barrel anytime soon. This is not so different from my thinking. I have been watching the commodity charts and they all look the same, and it is not good for commodities. BHP does a nice job of representing the general natural resource trend, as it has a little of everything, including coal, gold, copper and iron.
Notice that the stock price broke below the Moving Average about July 1. About the same time, red flags occurred on the MACD and Stochastic trends. Investools analysis suggests that three red flags are a strong sell signal. Other technical analysis suggests that when previous support (the moving average) becomes resistance, it is a further indication the trend has changed (see the bounces off the MA on July 14 and again on about July 21). Because all the commodity charts show this pattern, it may indeed be over, as intuitively we may feel that way (notice gas prices have dropped the past 2 weeks).
The second MA test is interesting for its timing. It was on July 23 that the financials broke out to the upside after Fannie and Freddie were rescued by the Feds. We have also looked in the recent past at how Commodities and Financials are countertrend of each other right now. So, the breakdown in commodities in July has supported the surge in Financials and the broader stock market (aided by Fed support for the banks, of course). No suprise here, because commodities are a surrogate for a weak dollar, and anything that helps the dollar hurts commodity prices denominated in US dollars.
How long will this last? Yesterday I suggested that the Chinese Olympics may be the signal of the top for the near / intermediate term for natural resource stocks (for the next several months). So much talk has been about the huge infrastructure buildout in China, and how China was rushing to get ready for the Olympics. As the Olympics begin, everyone will take a collective breath and know that the big buildout is done. Traders will respond accordingly using this as a signal.
Probably more important than this symbolism is the fact that the European and Asian economies are cooling off, most likely in response to decreased consumer demand in North America. Because much of consumer demand has been financed by loose credit in our banking system, it may not reignite until housing and banks have bottomed. Again, it is likely that won't happen before mid-2009.
What is a reasonable strategy until that time? I would suggest it is similar to the strategy followed until now, which is to invest in high dividend stocks and funds. This play has hurt me some the past year, as Value stocks really were out of favor. Some of that was due to the focus on international and commodity stocks, which don't issue dividends. The rest was the fact that much of the high dividend stock world comes from out-of-favor sectors, like banks, insurance, REITs and consumer products.
But, eventually this high dividend strategy will prove correct. All dogs have their day. So, it is best to stick with the strategy knowing it will eventually pay off. As long as we stay diversified with our high dividend investments, we won't be hurt by individual company failures (ala Bear Stearns). DHG is my favorite high dividend stock fund right now. Not because of recent performance, but because it has a solid strategy and continues to make its dividend payments without reduction. DHG has become much more of a commodity / natural resource play the past 6 months. When it first was introduced, there was quite a bit of financial exposure for the high dividend bank stocks. But the management team moved away from financials late last year and avoided most of the carnage early this year. To demonstrate the degree to which DHG now reflects the trend in commodities, see the attached chart comparing DHG (red line) to BHP (blue line) over the past 6 months. So, if commodities do bounce back, DHG will go with that trend. But if commodities continue to lag the market, DHG will be able to offer high dividends to offset the decline in commodity stocks.
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