Why Commodity Prices Indicate New S&P 500 Highs

Soaring commodity prices are a key indicator that the S&P 500 Index (SPX), which just broke new records, can rise even higher, according to Ari Wald, head of technical analysis at Oppenheimer, in remarks on CNBC. He focused on the fact that the price of oil is far outperforming that of gold, as detailed in the table below.

Bullish Sign For Stocks?

Source: CNBC; as of the close on Sept. 26; based on Nov. '18 oil contracts and Dec. '18 gold contracts.

Why This Is Good News for Investors

Wald said, "In the commodity markets, we're encouraged that the price of oil is outperforming the price of gold." He elaborated, "Oil, typically the more economically sensitive commodity, [is] outpacing gold, which is typically more a safe haven, we see that as a sign of bullish risk appetite," adding, "We think it confirms our positive view of the market and argues for a continuation of this advance."

Recent upward moves in oil prices have been driven by concerns over supply, The Wall Street Journal reports. OPEC and key allies led by Russia announced that they will adhere to production quotas that they set at the beginning of 2017, and increase output slowly. As quoted by the WSJ, Phil Flynn, writer of The Energy Report, a daily publication from The PRICE Futures Group, notes: "The glut is gone. Global oil prices are surging because we are now facing a market that is undersupplied."

Wald also observed: "The primary reason we're positive is here is one, the indexes' breakout through January resistance; two, internal breadth is broader than many give it credit for; and, three, we're generally missing the typical conditions exhibited at a market top." The table below summarizes the performance of key stock market indexes in 2018.

Stocks Still Rising

Source: CNBC; as of the close on Sept. 26.

Meanwhile, consumer confidence reached an 18-year high in September, per another WSJ story. This suggests continued strength in consumer spending, and thus also in the broader economy and the stock market. (For more, see also: 10 Stocks That Will Thrive As Consumer Spending Surges.)

Veteran investment strategist Richard Bernstein is among those who share Ari Wald's upbeat view. He recently asserted that "the signs of a true bear market are nowhere to be seen." (For more, see also: Why a Bear Market Won't Happen Soon: Richard Bernstein Advisors.)

Jeffrey Saut, chief investment strategist at Raymond James, is even more optimistic. He believes that we are in a secular bull market that, based on history, should last at least another 7 years. (For more, see also: This Bull Market May Trample Bears, Last Until 2025: Raymond James.)

Looking Ahead

Gina Sanchez, CEO of investment advisory firm Chantico Global, told CNBC that oil prices might drop if trade wars escalate, which would be a danger sign for the market. Even longtime bull Jeremy Siegel, a professor of finance at The Wharton School, said "I wouldn't be surprised to see another correction," in remarks on another CNBC program. In 2019, Siegel sees "a potential sideways reaction to economic news," with the two biggest risks, in his opinion, being continued trade conflict and interest rate hikes by the Federal Reserve.