To look at the markets -- all of the markets -- you'd think we're on the precipice of another 2008-type unwinding.
Every market has taken it on the chin in the past several days, and some have literally gotten slaughtered -- municipal bonds, stocks and particularly commodities.
I suppose this is to be expected. We have, after all, experienced quite a decent run in all of the capital markets in the last few months, particularly in commodities, and a sell-off can be part of the cycles of a healthy recovery, too.
But now, many of the commodities are reaching very important technical levels and how they act as they approach these levels will tell the tale of whether this universal sell-off is part of the normal digestion cycle, or the beginnings of a more broad puking of assets.
Three commodities, I believe, will give a very strong indication of where we are going: crude oil, cotton and corn. All three have experienced very significant rallies: In the last three months, crude oil broke out of its trading range to see a high of almost $88 dollars a barrel, a rise of 22%. Corn saw a more spectacular run, seeing a recent high of $ 6.03 a bushel, a rise of 53%. And cotton was even more incredible, running to a high of $1.47 a pound, a gain of close to 80%.
The recent rise in all commodity prices is a close function of both the perception of investors to the hopes of an improving economy, as well as an indicator of real demand for raw inputs, both in the U.S. and the emerging markets of China and India.
And even though rising prices for commodities should have a sobering effect on other capital markets, they have become an unfortunate evil that has gone along with a recovering economy as well. How these commodities act as they reach very important technical levels on the downside will, I believe, tell the tale of whether we are in a moment of healthy digestion, or a bad case of indigestion.