Market Correction Approaching, Commodity Correction Underway

- Dugald Malcolm, Montreal, Canada

As the S&P 500 is poised to end its seventh consecutive week of losses, the question is begged as to whether or not we are in store for a full-fledged correction of the markets. A correction, of course, is defined as a drop in the market of between 10 to 20%. Currently, at an 8% decline, we are not far off.

Commodities and commodity related equities, however, are different story. Not only have many of them entered correction mode, some are actually in bear market territory with declines in excess of 20%.

Silver, for example, is one such commodity. After peaking at $48.42 an ounce at the end of April, it gave up 28% of its value by early May. As of yesterday’s close, silver is still 26% below its recent high.

The grains sector has also been under pressure as of late. One of the harder hit is wheat. It has corrected off its high by 18% since April. Unlike silver has done around the $34 an ounce mark, wheat does not appear to have established its short-term level of support, so more declines in the price of wheat might still be ahead.

Oil is another commodity that is currently suffering from a price correction. April highs have eroded by 16% – much to the delight of the summer driving crowd.

One commodity that has held up quite well through all this, on the other hand, is gold. It rests at just 2% below its recent highs. Its resilience in all this sea of selling is not being shared by the gold miners, though. The Market Vectors Junior Gold Miners ETF (NYSEArca: GDXJ) is breaching bear market territory after declining 21% since April.

It appears as though the old adage of “sell in May and go away” should very well have been heeded this spring. Major indexes as well as commodities continue to be under pressure and are being sold off.

It is interesting to note that despite the spring selloff, many commodities as well as indexes are still above their 200-day moving average. This tells us two important things: the first is that prices in April had gone too high to fast and secondly, that until we see a complete reversion to the mean (i.e. the 200-day moving average), there could be more downside to come.

On the plus side, however, there are signs of oversold conditions starting to arise in certain areas, such as gold mining stocks, and this has bargain hunters starting to lick their chops in anticipation.

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