According to the Game Plan for Late-Cycle Investing, as the economy moves towards its latter stages, commodities tend to outperform equities and other asset classes. Frank Barbera—market technician, portfolio manager, and editor of the Gold Stock Technician newsletter—believes we're likely in that process right now and recently discussed his outlook on the stock market, bonds, commodities, and precious metals with Financial Sense Newshour.

Volatility Is a Return to Normal

Stock market volatility has picked up this year, though in percentage terms this really just a return to historical norms, Barbera explained.

The real anomaly occurred over the last 2 years where the market was moving straight up in parabolic fashion before culminating in a blow-off top late-January.

“Think of this more as a return to normal than anything else,” Barbera said. “Comparatively speaking, it is a rise in volatility, but at least so far we really haven't seen the stock market averages breakdown below major key levels.”

Possible Topping Process

One disquieting point is that after the big break we saw in early February, we swung from very high momentum to deep oversold conditions without anything in between, Barbera noted.

“We had this abrupt break in the market,” he said. “That's very historically unusual. Usually, when you have high momentum, you'll get a pullback, getting a push to new highs or maybe two pushes to new highs before you get a decent-sized break, and this just flipped on a dime.”

(Click on image to enlarge)

Source: Bloomberg

This is consistent with a parabolic move, and it can sometimes mean that we’ve seen the final peak. Even if that were the case, however, Barbera believes we’ll likely see an approach or retest of the highs before the market definitively turns down.

“For the time being, I would give the stock market the bullish benefit of the doubt, but I don't think we're going to see another runaway advance on the upside,” Barbera said. “I think what you're seeing here is the market moving into a distribution top. There is some potential for a double top … but the real message is it's getting very late in the cycle.”

Gold and Bonds May Shine

Barbera thinks we're likely in the process of a late-cycle run in commodities.

If the economy turns down, this does pose a risk for most industrial commodities, but we’re not quite there yet, he said. Bonds, on the other hand, especially Treasuries and high-grade corporates, appear to be making a base. Now might be a good time to follow traditional risk-off bonds, high-grade corporates and some of those funds that can do really well in a down cycle.

Gold recently attacked the $1,365 area, which has been key resistance, while $1,305 to $1,310 has been key support. If we go through $1,365, gold may target $1,480 to $1,525 on the first push up, Barbera believes.

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