This chart I found somewhere on Barry Rithholtz’s  website.  I have no idea how accurate it is. Obviously the CRB (Reuters Jefferies) index has not been in existence for all this time so most of this chart must be reconstructed. Whatever, the main point is that it is possible to put a 5-wave EW count on this chart, starting in 1897 and ending in 2008, 110 years roughly speaking.

The hundred plus years before that where clearly characterized by a world economy that fluctuated between inflation and deflation but otherwise was pretty well flat as far as the eye could see. Intuitively it is clear that this index is a function of both inflation/deflation and productivity. With inflation rising this index should rise, alternatively productivity gains should be reflected by a dropping index. Apart from that supply shocks (new finds) and or extrinsic demand shifts (as with China over the last 5 to 10 years in the context of metals) can have a significant impact on individual or groups of commodities but using the index should dampen those effects. No farmer has ever woken up in the morning to find an extra hundred head of cattle in his fields.

Unlike other “values”, commodities are usually stored in warehouses or they are in transit. In either case there are warehouse receipts and or drafts drawn on buyers and accepted by their banks under letters of credit. These trade bills constitute the nearest thing to money so it is not surprising that the Fed. was created ( starting in 1910) to facilitate the discounting of these bills, that is create money based on commodities. It probable is not a coincidence that the CRB index shoots up precisely at the time the Fed. was created. Back in the eighties the Fed. was obsessed with the money supply, M1 , M2, M of zero velocity etc. and then they started to concentrate on capacity utilization, and later on the CRB index as it existed then. All of these are either money or a proxy for money.

So can we predict a bear market? In our humble opinion absolutely yes. We did!  That is we were able to accurately identify large sections of the moves even if we did not necessarily identify a top, perhaps simple because we were not looking. Judge for yourself;

First of all, with the benefit of hindsight, the wave count shown is perfectly acceptable even if one could have made the argument that we had only completed wave 3, rather than the entire 5 wave sequence. However, the fact that wave 5 is roughly equal to wave 3 but does all that in in 9 years rather than in one hundred years clearly was a wake-up call. Something is happening at the start of the new century and it is not Y2K. At that point one should have anticipated an a-b-c correction. Again we were asleep but here is our first chart of Jan.2011;

The assumption was that the first leg down would be retraced by about 50%. That is the “safe” thing to assume. As it happens the retracement continued to the next Fibo. point, 61.8% at about 370. That is an error or 20 crb points but the arrow down shows a further drop to roughly 150. The low so far is at 164. Comments at the time, the blog is still on this website were; "In short, if my Jan views come true anyone owning oil, gold, coal etc. etc. stocks will get devastated. The TSX with its large exposure to these commodities will get creamed.”  Many of these stocks had yet to make their tops, either also as b-waves or in an absolute sense so you had all the time to get out. Where do we go from here?

EW works like a stop-light, it too has 3 colours, go ahead, stop and wait. From the top chart you can see that we have already dropped to the level of the 4th wave of previous degree, in fact for both the entire move and also the 3d wave within it. 61.8% down is at that same level so we have done that. Equality between waves C and A down has not yet been achieved, that is at around 120 or so. Will it go that far? Maybe, maybe not so treat it as a yellow light and wait. If you manage to catch 2/3 of a move you are right up there with the best.

Please see some of the earlier blogs on the CRB, they were quite accurate and today we will try to repeat that. Originally we were obsessed with the idea that there was a large B wave from the depths of the great recession lows, if for no other reason than that it showed up in so many different places. We show that scenario in beige. You can find the 3-wave structure of the B wave in the 2011/12 blogs in great detail.

If that scenario is to be correct the developing C wave down must subdivide as a 5 wave structure. It could still do that as shown in beige. However, to date this move down from about 370 has all the attributes of a 3 –wave affair and very precisely at that. This does not preclude the 4 and 5 from being added in the next year or so but it does raise the question whether or not there is a serious alternative. There is. It is possible that the original B wave becomes more complex, that is to say that the drop from 370 to 200 is not a C wave in progress but a b-wave within the larger B-wave. Initially you cannot tell as in both scenarios the direction would be up.

Typically bubbles burst and the index, commodity, whatever trades below the starting point of the preceding bull run. That suggests that we are not done yet but un till we break 270 (overlap) we will not know for sure where we are. I prefer the beige scenario, with the C wave developing as a wedge, but the black one is very compelling, see below,both legs a and c are absolutely perfectly vector equal just a fraction below where we are presently;

Note;  Another alternative would be a double zig-zag, as in a-b-c X a-b-c. The second a-b-c is in the Stockchart above. The whole thing would be complete ( which conflicts with a return to levels below the start!) More importantly for this to be so wave A would have had to itself subdivide in a 3 wave structure. To me, if anything, it looks like a straight line down without a visible intermission.

Back in Jan of 2011 we opined that this index would peak at around 350 in or around March of that year, and then drop like a stone (see that blog under CRB). The timing was pretty well on but the level was slightly off as the index climbed to 370. Here is today’s chart;

We are not at all confident about the count that we put on this chart after the high of 370. It looks a lot like the “cascading waterfall” that Don Cox from Harris Bank used to call this thing in his “Points” publication. However that specific pattern does not exist in EW land, so perhaps it is a combination. In any event, what we are (and were) confident about is that this index will drop at least to the 250 level before a serious rebound might (repeat; might ) occur. The index is not readily tradable but if you extrapolate the direction of this index to stocks like Potash and even stocks in the metals and oil space, even if they are not represented per se in this index, you would have saved yourself a lot of agony lately.

This was my take on the CRB index, the Jefferies Reuters one which is a little different from the “old”one we used to fret about, back in January of this year.

There are two things one must know about commodities. 

1. They are always the last to peak! Normally people do not play them, only when they are in an advanced state of euphoria, prodded along by there brokers.

2. Unlike stocks there are few idiosyncratic attributes that makes these things move. In the end they will gravitate to the marginal cost of production. 90% or so of traders consistently lose money, almost all of the time. (lack of discipline, market convictions).

In short, if my Jan views come true anyone owning oil, gold, coal etc. etc. stocks will get devastated. The TSX with its large exposure to these commodities will get creamed. Here is where we are now!

I was wrong in assuming we might stop at the 50% line, we went a little further. But the large B-wave (the basis for this prediction), is a perfect text-book example. The C is equal to the A in both time and magnitude. There is no alternative count!!

250, the level of the B where the rally paused, is the first target level.That is down another 20% from where we are today. Just think what that does to your gold and oil stocks!