Montreal, Canada

The list of commodity indicators turning bearish continues to grow since April. If these trends continue then it's a pretty sure thing that stocks and other risk based assets haven't seen their lows in this correction.

Over the past eight weeks copper, lumber, the Baltic Dry Index and steel prices have all rolled over suggesting the big rally in Treasury bonds (lower yields) is indeed justified as new fears of a double-dip economic recession emerge in the United States.

Benchmark LME (London Metal Exchange) steel contracts for delivery three months from now ended Tuesday at $427 a metric ton – a 31% decline from their April nadir. Like several other important commodity benchmarks since April and May this indicator has turned bearish.

One of the most obscure commodity indexes, the Journal of Commerce Industrial Smoothed Index, crashed more than 50% in May alone and is now officially in a deep bear market. In May, the index violated its 2008 lows. Yesterday, however, the index rallied 10% after weeks of heavy declines.

Since peaking in 2008 the majority of commodities remain miles away from their best levels. Only a handful of raw materials have hit new highs over the past two years, including gold, cocoa, sugar, coffee, cotton and some rare earth metals. The rest of the complex is still stuck in the mud despite some big rallies off the January-February 2009 lows.

The foundations for a sustainable economic recovery are now in the "Show Me the Money" stage as 2009 is behind us and major headwinds face investors in 2010, including tax hikes, the removal of Federal stimulus programs in some areas, poor trends in bank credit expansion, a high unemployment rate that refuses to meaningfully decline and another European credit explosion lingering. And don't count on China to save our butts; the Chinese economy is showing signs of cooling, not accelerating.

The short-term trend for commodities is bearish. Positive developments encouraging a reversal in sentiment would include higher inflation spreads as measured by TIPS (nominal bond yields less TIP yields), higher long-term U.S. interest rates, declining unemployment and a recovery in copper prices. For the moment, these indicators are discounting a slowing economy accompanied by the rising threat of falling prices or, at the very least, accelerated disinflation.