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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About Duncan Davidson 228 Articles

Affiliation: NetService Ventures

Duncan is an advisor to NetService Ventures, where he focuses on digital media and the mobile Internet.

Previously he was at four start-ups: Xumii, a mobile social service based on a Social Addressbook; SkyPilot Networks, the performance leader of wireless mesh systems for last-mile access, where he was the founding CEO; Covad Communications (Amex: DVW, $9B market cap at the peak), the leading independent DSL access provider, where he was the founding Chairman; InterTrust Technologies ($9B market cap at the peak), the pioneer in digital rights management technologies, now owned by Sony and Philips, where he was SVP Business Development and the pitchman for the IPO.

Before these ventures, Duncan was a partner at Cambridge Venture Partners, an early-stage venture firm, and managing partner of Gemini McKenna, a joint venture between Regis McKenna's marketing firm and Gemini Consulting, the global management consulting arm of Cap Gemini.

He serves on the board or is an adviser to Aggregate Knowledge (content discovery), Livescribe (digital pen), AllVoices (citizen journalism), Xumii (mobile social addressbook), Verismo (Internet settop box), and Widevine (DRM for IPTV).

Visit: Duncan Davidson's Blogs

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