A bear market does not end when there is no more bad news. Commodities have been through a long and deep bear market, with only the Great Depression of the 1930’s producing a worse 10-year rolling return (Fig 1). We have been continuously assailed with stories of over-supply & surplus production capacity in every sector of the commodity asset class.
However, in spite of this news flow continuing unabated, commodity prices have begun to move up since mid-January. Instead of making lower-lows many are now making higher-lows and, more importantly, higher-highs – satisfying the chief determinant of bullish trends. The Bloomberg Commodity index has risen by 10% and the twin talismanic commodities of crude oil and gold have risen 40% and 21% respectively since their lows, thus fulfilling the conventional definition of bull markets.
Fig 1: 10-Yr Rolling Return [Source Bloomberg – March 2016]
However, last week many commodities surrendered some of their exuberant 2016 gains. Does this mean that we have seen just one more false alarm, and that the bear is back? Not at all – this is classic behaviour at the end of a bear market and the beginning of a new bull market.
Fig 2: Traditional Elliot Wave pattern
Price Behaviour
Conventional theory holds that price behaviour consists of primary trends, corrections in trends, and static (irrelevant small changes in price). There are many indications that the primary bearish trend has now played out, that we have just seen the start of a new primary bullish trend, and that we are currently experiencing the 1st correction in this bullish trend. This is simplistically illustrated in Fig 2. Wave 1 unfolded between mid-January and mid-March 2016 and commodities are now in the corrective wave 2. I believe that the long bullish wave 3 lies ahead.
The Real World
However, the real world is always more complicated and less clearly defined. Commodities are the most volatile of all the asset classes. There will be both bullish & bearish surprises en route to the high of the next wave 5, after which the next bear market will unfold. Until then, get your asset allocation and position-sizing sorted, take your commodity exposure and resist the temptation to micro-manage the positions.
A bear market does not end when there is no more bad news. A bear market ends when prices no longer fall on bad news.
When do bear markets end?
