A Crack in the Commodities Story

Prices of goods ranging from copper to cotton are beginning to break down following strong runs.

There are significant cracks in the commodities story, even as oil, gold and silver generally continue to perform well.

In recent weeks, prices for several commodities from soybeans to sugar have stalled. Cotton scored a massive bearish technical reversal last week. And in the stock market, fertilizer and copper stocks have been acting poorly.

Fertilizer stock CF Industries Holdings (NYSE: CF - News)was a market leader for much of the past eight months, but last week started to act rather poorly (see Chart 1). While the broad market edged higher it started to move lower with a particularly bearish performance February 18.

Although it has not significantly broken its rising trendline from last summer or any major moving averages the price declines seem rather suspicious. Momentum indicators, such as the relative strength index, peaked in January setting up a bearish divergence with prices.

And it is not alone in its sector. Potash Corp. of Saskatchewan (NYSE: POT - News) has been floundering for two weeks before completing a bearish pattern called an "evening star" in candlestick chart parlance. This pattern is essentially a failed burst higher. It was followed by a strong day of selling Friday and a decisive pummeling in Monday's trading.

Chile-based Sociedad Quimica y Minera de Chile (NYSE: SQM - News) is another example of a stock that has engineered a stealth transition from bull to bear with its own Monday thrashing. Technically, it was the second time this year that the stock formed a "gap" on the charts because selling pressures swamped buyers and prices could not trend smoothly lower.

In the copper sector, Freeport-McMoRan Copper & Gold (NYSE: FCX - News) also sports a pair of gaps to the downside (see Chart 2). Given the gold component in the company's mix, that it is down 17% in little more than a month as gold climbed back above $1400 per ounce, tells us something about copper miners. It is not good.

Monday's decline took the stock below a small trading range and confirmed a downside break below its key 50-day moving average. Both are bearish signals.

Finally, Southern Copper (NYSE: SCCO - News) has broken down from the ubiquitous head-and-shoulders (see Chart 3). This pattern is marked by a central peak surrounded by two lower and roughly equal peaks. The lows between the peaks define the pattern's bottom and when penetrated to the downside the change in trend is confirmed.

Given that copper itself remains in a solid rising trend after reaching an all-time high just last week, this adds to the argument that something is quite wrong with copper stocks. At a minimum, it casts real doubt on the power of the rally in the underlying commodity.

I am far from a commodities bear but we cannot ignore the evidence from several markets and sectors. Even emerging markets, which are typically commodities dependent, have been floundering for months.

Investors should carefully weigh all evidence before jumping on the commodities bandwagon, because some of its wheels are looking a little wobbly.