Is the Shanghai Market Predicting a Reversal in Commodities?

Wheat and other commodities have risen parabolically recently, an indication of a blow-off top in the making. Blow-offs are followed by severe drops. Is the blow-off top at hand?

David Rosenberg noticed how the Shanghai stock exchange is a four-month leading indicator of commodity prices. The logic would be a variant on the old saw that stocks predict recessions by six months: that China is such a factor in real demand for commodities, a slackening of Chinese purchases will drive prices down, and the Shanghai stock exchange is a leading indicator of a coming slackening of real demand.

SeekingAlpha revisits this correlation since we are now four-months after the latest fall in the Shanghai index. Are commodities about to follow?

Copper is the canary in the commodity coal mine – very sensitive to changes in real demand. Copper came to life in mid-June, in effect signaling that the Flash Crash was more likely a correction not a change of trend. The canary, however, is beginning to show signs of asthma – copper has reversed to down again; and instead of recovering from the Flash Crash we had several sideways months.

During the period of the recent commodities bubblet, the USD fell fairly hard. The USD has now reversed, and very sharply, in sync with the drop in stocks. It may be my Aug4 turn date marks a major turn across all markets, with commodities shortly to fall hard.

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