Pring Picks Pimco: Commodity Outlook
09/05/2003 12:00 am EST
"Technical action continues to point to inflationary pressures in the financial markets," says technical expert Martin Pring in his InterMarket Review. Here, the founder of Pring Research provides an overview of the outlook for various sectors of the commodities market–and a recommended way to play this trend.
"Our ratio of inflation sensitive stocks to deflation sensitive stocks continues to rally in favor of the late cycle inflation sensitives. The recent upside breakout still leaves the ratio well below historical highs; this in itself, also suggests that the inflationary rally has substantial upside potential from current levels. Meanwhile, our Inflation Barometer has just broken out from a triangle formation and its appears that the current breakout is valid. This view is also supported by the fact that the CRB Composite has failed to break down from a head and shoulders top. Usually such failures are followed by powerful rallies as new buying comes in and short sellers are forced to cover their positions.
"Bond prices and the Bond Barometer both deteriorated in August. In the current cycle, the speed and magnitude of rate cuts have been at historic levels. Moreover, two rate cuts have developed as commodity prices have been rallying. This relationship is certainly not the final arbiter of the cause of commodity price inflation, but it certainly does suggest that the Fed may have erred far too much on the side of ease. The result is likely to be sharply higher commodity prices and bond yields in the course of the next year.
"We would also like to comment on some of the sub-components of the commodity sector. The first is the Goldman Sachs Industrial Metals Index appears be in excellent technical shape from a long term view. The Livestock Index has now experienced a breakout from a seven-year consolidation pattern. The Agricultural Index, has also broken to the upside and the establishment of a new bull market high is a realistic possibility. Finally, oil, as the flagship of the energy sector, is extending its trading range. The long and intermediate trends are still bullish, which suggests that recent hesitation by their short-term counterpart will soon be resolved on the upside.
"The technical position of the precious metals markets continues to look positive. Resistance exists in the $420 and $480 areas for dollar based gold since these levels represented barriers to upside movement in previous advances. The recent breakout in the price looks quite positive. An immediate extension to the recent rally is therefore an odds-on probability. Silver has also broken to the upside by completing a five-year base. The overbought short-term position may indicate the need for further near-term consolidation, but the strong rally by its long-term counterpart suggests that there is much further to go.
"To benefit from these trends, we recommend a 10% allocation in the Pimco Real Commodity Return Fund (PCRAX). This vehicle attempts to replicate the performance of the Dow Jones AIG Commodity Index. This fund is the only pure commodity play outside the futures markets that we know of. Combined with a 15% allocation to gold, silver, and gold shares, this places our overall allocation to commodities at 25%."