Long-Running Commodities Boom Goes Bust

BEYOND ELECTIONuncertainty, regulatory risk and geopolitical upheaval now facing the markets, the macro question is whether the strong commodity/weak dollar plays that have benefited foreign stocks and bonds, gold and so many other trends over the past few years are reversing.

Oil has already corrected about 20% off its July highs, putting it officially in a bear market. The greenback has rallied sharply, with the U.S. dollar index climbing above its 50- and 200-day moving averages. This comes as both of those trends have become firmly rooted in the day-to-day coverage of the financial markets. In 2001 oil and the dollar were rarely discussed. As I've talked about in recent weeks, they've now been front-page news for the better part of a year.

If you look at the price action in many parts of the equity market, you can objectively conclude that the commodity trades, as I've previously pointed out with both gold and oil, are no longer the market leaders they were for much of 2002-06. Stocks tend to be the most forward-looking indicators we have. Witness gold stocks, which showed dramatic outperformance in 2001 and 2002, long before the metal itself (and accompanying public participation) took off.

The fact that so many of these previous leaders, names as varied as Stillwater Mining (SWC) and Exxon Mobil (XOM), are at multimonth lows is undoubtedly a harbinger of a greater shift underway.