Stocks, as measured by the Dow Jones Industrial Average and the Standard & Poor’s 500 Index, have been trending gently upward in the last three weeks, including the traditionally slow trading sessions from just before Christmas to New Year’s. This notwithstanding Monday’s (1/10) modest burp.
Commodities were a mixed bag in that period as gold fell, crude oil jumped out to a new two-year high, and the grains rose to a one-year high as well, led by corn. But the new star of the show for commodities is sugar, which stormed out to a new high after word that a cold front had virtually wiped out Florida’s sugar cane crop, which is the largest in the United States.
“It’s ironic that a commodity which is given away at every restaurant in the world could at the same time become the most valuable,” writes Jon D. Markman in the Money Morning e-newsletter. “The main reasons: rising demand for sugar cane as an efficient feedstock for engine fuel as well as the burgeoning sweet tooth among the rising middle classes in Asia.”
Quick side note: Cane is popular as an energy feedstock in Brazil because it results in a huge net positive energy gain: about 8:1 energy output to energy input, Markman adds. “Contrast that with corn, used in this country as the feedstock for ethanol, which requires more energy to make than it creates. Corn is an absolutely ridiculous fuel source, and yet it persists due to massive government subsidies lavished on the Midwest by politicians desperate to cultivate the farm vote.” Investors are looking at the iPath DJ-UBS Sugar Subindex Total Return (NYSE: SGG) exchange-traded fund.
Back to stocks, bad weather tends to have a negative impact on retail sales. If both U.S. and European consumer products makers experienced depressed sales, analysts are going to be out in the next two weeks lowering earnings estimates. That could depress retail and other stocks in the coming days and weeks.
Following NIKE Inc.’s (NYSE: NKE) warning of weaker sales in China, investors went on high alert for softer sales by its fellow exporters. Markman said he suspects that Beijing’s clampdown on credit is impeding retailers across China from stocking their shelves not just with Nikes but with all kinds of discretionary goods such as soaps, electronics, branded clothes and non-staple foods like sodas.
Going forward, Money Morning advised investors to keep a close eye on the market’s 20-day average, which you can see on charts of the S&P 400 Midcap Index as the four-week average to make it easier to see. Bad trouble often starts with a little trouble. And little trouble is always signaled when a weakening market trades under its 20-day average at the end of a week, Markman added. No moving-average crossover system is perfect, but these kind of momentum shifts can at least tell you to lighten up on positions and don’t add anything new.
Markman concludes: “The most likely time for such a stumble would be the third week of January, but if those weather-related earnings cuts materialize a slip could come much sooner. The magnitude could be as much as 400 to 600 points in the Dow Jones Industrials, or -3.5 percent to -5.5 percent. That would be scary, but in my estimation not permanent — and I anticipate recommending that you eventually use it as an opportunity to buy. We managed to do that at the August low and the November low by pointing out the clear patterns of methodical institutional accumulation amid general panic, and should be able to do it again. We just need to think like predators instead of prey.”