Charted Territories

By Jim Donnelly, Olson Global Markets

With volatile political conditions erupting in the Middle East, commodity prices could spike higher as momentum buyers take on more risk. Crude oil prices reversed sharply higher on Friday, as did precious metal prices, causing the Reuters/Jefferies CRB Total Return Index (CRB) to jump by 1.2% to 335.44. Although overbought conditions are now present on long-term charts, technically the problem is that the CRB index could rise much, much higher.

After breaking solidly above key “cross” trend line resistance at 320 on long-term charts, it is possible to see the CRB index eventually move up to test the “backside” of former trend line support (now resistance) currently sitting at the 399 level and rising over time. If that were to occur, it would represent a nearly 19% jump in commodity prices from current levels. In turn, that would likely exacerbate the “food inflation” problem that has aided much of the political unrest abroad.

It would also have the potential to retard economic improvements in U.S. At the very least, additional commodity price increases would likely narrow many a profit margin and stunt earnings growth in the months just ahead.

On the other hand, if tensions in the Middle East were to abate, a break below former trend line resistance (now support) at 320 on the CRB would have to be considered a very big plus for a number of global economies (including the U.S.) and therefore equity investors as well. From this vantage point, however, that kind of scenario does not appear likely to play out any time soon, particularly with the level of uncertainty that now exists.

http://www.ogmarkets.com

By Jim Donnelly, Olson Global Markets

With a break above key “neckline” resistance at 408, the Dow Jones Utility Index (DJU) has now formed a bullish “reverse head & shoulders” pattern that has been in the making since the post-Lehman Brothers plunge of October 2008. Although it has only just “nudged” above “neckline” resistance, this pattern suggests much higher levels are in store for utility stocks since it targets a potential move up to the 525 area.

A continued thirst for steady and reliable income from pension plans, retirees, college endowments and others who rely on interest and dividends for their day-to-day needs has not diminished. Returns from low yielding U.S. Treasuries, intermediate-term CD’s and money market accounts as alternatives remain extraordinarily stingy.

Jitters over the credit worthiness of high-yield junks bonds, and their relatively tight spreads to long-dated treasuries are also a factor. So are credit concerns over a number of municipal debt issues. Unease over various sovereign debt issues combined with artificially low U.S. treasury yields pose an allocation problem as well.

As a result, an increased appetite for utility common stocks has apparently lifted the Dow Jones Utility (DJU) index steadily higher. An increase, albeit modest, in economic activity has also lifted demand for utility generated power.

Nevertheless, a move toward the 525 area on the DJU would be impressive, if it occurs. And although expectations for a rise in interest rates is generally expected by many investors, a move of this magnitude in the Dow Jones Utility Index suggests that short and intermediate term interest rates could remain sluggishly low for a longer period of time than is currently anticipated.

http://www.ogmarkets.com