In a couple of articles I wrote last week, I stated that my investment models indicated that stocks would continue to be volatile over the near-term, and that stocks would pull back towards the end of the week after rallying during the previous week.
Stocks did in fact fall sharply last Thursday and Friday, with the Dow Jones Industrial Average declining a total of 316 points (3.4 percent) during the second half of the week.
Most economic indicators suggest that stock prices will continue to trend lower during the months ahead.
For example, the Institute of Supply Management reported yesterday that its index of manufacturing activity fell below 50.0 — which indicates an economic slowdown – for the second time during the past three months.
Meanwhile, General Motors, Ford and Toyota, the three biggest auto retailers in the U.S., announced that sales fell in February as a result of rising fuel prices and a deteriorating employment market.
GM's sales of light vehicles fell 12.9 percent, while Ford's sales declined 6.9 percent. Total auto sales fell during February for the seventh time in the past eight months. Analysts forecast light-vehicle sales in the U.S. this year of about 15.5 million, the lowest since 1998.
In spite of the negative developments mentioned above, numerous technical indicators suggest that stocks will remain stuck in a volatile, sideways trading range for the next couple of weeks.
Meanwhile, a few unforeseen geopolitical developments, coupled with the resumption of the U.S. dollar's decline against other major world currencies, suggest that commodity prices may continue to rally over the next couple of days.
Nevertheless, my models indicate that the prices of energy and agricultural commodities, as well as both precious and industrial metals, are due for a big pull-back.
As you can see in the chart below, the supply of oil surpassed demand during January. The latest report from the Energy Information Administration indicates that oil inventories continued to outstrip demand during the past four weeks.
With the winter heating season in the U.S. soon coming to an end and the summer driving season still several months away, I expect the demand for oil to decline further over the next six weeks.
Meanwhile, my research suggests that the Federal Reserve will lower short-term interest rates for the last time this year at its March 18 meeting. In addition, I expect foreign central banks to continue pressuring the U.S. Treasury to implement measures to curtail the dollar's descent.
I therefore expect the exchange-value of the dollar to stabilize by the end of March. A stabilizing dollar would of course be a negative development for the future direction of commodity prices.
In addition to dollar's impact on commodity prices, investors should not overlook the fact that the recent surge in commodities has been largely related to several one-off events: (1) Last Thursday's oil supply disruption in Ecuador (due to a damaged pipeline caused by a landslide); (2) The shutdown of gold and platinum mines in South African during late January (due to a nationwide electricity shortage).
Once these temporary supply disruptions are corrected, the supply of oil, gold and platinum will likely rise significantly, an event which will likely cause the prices of these commodities to fall.
Lastly, recent trading action in most commodities suggests that short-term buying demand is close to being exhausted.
In light of the factors mentioned above, I urge you to ignore the recent hype about commodities and to avoid investments in commodity-related stocks or ETFs at this time.
I also recommend for investors to continue sitting on the sidelines in cash-equivalent securities and to hold short positions that they may have in index mutual funds or ETFs. If you'd like more information regarding my thoughts on the investment environment and how to profit during both bull and bear markets by investing in the right exchange-traded funds (ETFs), Click here now .
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