Will Commodities Save Your Portfolio? Connect the Dots

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Will Commodities Save Your Portfolio? Connect the Dots
If stocks and hard assets are "supposed to" move in opposite directions, how do you explain this chart from Bob Prechter's "Conquer the Crash"?

By Nico Isaac
Thu, 06 Oct 2011 17:45:00 ET

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When I thought about how to start today's article, nothing seemed more suitable than these words from the late Steve Jobs:

"You cannot connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in the future."

This is the great divide between mainstream financial analysis and technical studies such as the Elliott Wave Principle. The first group tries (and often fails) to connect the dots looking forward as they boldly extrapolate existing trends into the future.

Case in point: In 2008, the mainstream experts were dead set on the idea that commodities would provide shelter from the maelstrom raging within stocks and bonds. Their outlook was based on expectations for a repeat of the 1970's inflation and the theory that stocks and commodities always move in opposite directions. In the words of one March 2008 news item: "Odds are high that the US is in another super-cycle commodity boom which would mean the top wouldn't be seen until 2022."

YET -- from its July 2008 peak, the Reuters/Jefferies CRB Index of commodities plummeted 58% in its biggest decline in 28 years -- right alongside plunging stock markets.

As Steve Jobs wisely observed, you can only connect the dots looking backwards. Elliott wave analysis rises above using this very method. As the commodity boom took off in early 2000, Elliott Wave International president Bob Prechter examined 100 years worth of data and observed that the closest historical proximate to the commodity mania was not the 1970s inflation -- but rather the deflationary cycle of 1929-32.

In his 2002 book Conquer the Crash, Prechter explained how an excess of credit, not cash, was lifting all asset classes together. And, once the tide turned, it would also bring all supposedly inverse markets down together, too. Chapter 21 of Conquer the Crash wrote:

"Some people today who are concerned about economic upset are touting commodities... I do not buy this argument, at least not of today. As shown in figure [3], the Commodity Research Bureau (CRB) Commodity Index has tracked the S&P with a slight lag, since mid 1998. As I see it, this correlation means that most assets are moving up or down more or less together, probably as liquidity expands and contracts. If so, hard asset prices [will get crushed] right along with share prices."

Now, flash ahead to Prechter's September 16, 2011, Elliott Wave Theorist. There, Bob updates the original chart from Conquer the Crash and shows whether that positive correlation between various asset groups remains intact and what it means for the FUTURE of the overall economy.

Act now and take advantage of an amazing offer. For a limited time, you can get a FREE copy of Bob Prechter's Conquer the Crash (now in its expanded, 2nd edition) with a risk-free Financial Forecast Service subscription -- all at 57% off for a limited time. Click here to get started.

Tags: 1929 Stock Market Crash, Robert Prechter, CRB index, deflation, Elliott wave, Elliott Wave Theorist, fundamental analysis, history, inflation, liquidity, technical analysis

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