Commodity Bears (i.e., Everyone) Should Read This

The commodity "oversupply" story remains intact, with high levels of capital spending in the Energy and Materials sectors persisting, despite the 3 1/2-year downtrend in commodity prices. But for those wishing to buck that longer-term bearish trend, now might be an interesting time.

We discussed the sharp springtime spike in commodity sentiment in the June Green Book, noting that "increasing investor enthusiasm as prices move progressively lower is the hallmark of a major bear trend (i.e., the 'slope of hope')." The bear trend resumed immediately and forcefully, but we now wonder whether commodity sentiment hasn't overshot to the downside.

Yes, the 15% setback in the Continuous Commodity Index has been a broad and painful one. But the five-month collapse in our composite commodity sentiment measure is comparable to the one that accompanied the 50% decline in commodities during 2008. In other words, the negative reaction appears disproportionate to the actual damage. Don't look for further substantial declines in commodity prices over the very short term, except perhaps in gold.

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