http://www.theglobeandmail.com/globe-investor/investment-ideas/features/market-lab/commodities-dive-akin-to-a-technical-nervous-breakdown/article1605626/

Forget about the stumbling equity markets. As gripping as they may be to most of us (and our portfolios), a more dramatic tale has been unfolding over in the commodity pits.

While most investors were fixating on the ups and downs of the Dow and the S&P/TSX, the commodity market has gone from simply bad to downright deplorable. That the Reuters/Jefferies CRB index sank more than 10 per cent from early May to early June was bad enough; much worse is the fact that the world’s pre-eminent commodity price benchmark has suffered what amounts to a technical nervous breakdown in the process.

THE DEATH CROSS

BMO Nesbitt Burns economists Douglas Porter and Benjamin Reitzes noted that the two leading economic growth-driven components of the CRB – oil and copper – have fallen below their technically critical 200-day moving averages for the first time since late 2008. Both are now close to seeing those 200-day averages slump below their 50-day moving averages – the dreaded “death cross,” an unequivocally bearish signal.

Well, guess what? The CRB index itself is way ahead of them. It attained the death cross in late May. What’s more, both moving averages have turned downward, something that hasn’t happened since the global markets bottomed in March, 2009. And this even as gold, another major component of the CRB, hit record highs.

The last time the CRB notched up a death cross, in the fall of 2008, the event was followed by a collapse of epic proportions. The commodity index lost 50 per cent over the next six months. While a repeat of that rout seems unlikely, the ominous technical signals do speak to just how uncertain investors have become again.

“Note that the CRB is now below levels prevailing a year ago, when the North American recovery had not yet even begun and the U.S. economy was still losing around 500,000 jobs per month,” the economists wrote in a research note. “This steep pullback points to a much deeper malaise among investors, even on the previously impregnable growth outlook for Asia.”

THE EARNINGS DRAG

As UBS Securities Canada Inc. strategists George Vasic and Garry Cooper noted, it also points to a weakening outlook for the commodity-heavy Canadian stock market – which to this point has withstood this spring’s market setback better than many of its global peers.

They recently cut their 2010 earnings forecast for the S&P/TSX composite index by 4 per cent and lowered their 2011 forecast by 2.5 per cent, laying the blame squarely at the feet of the resource sectors. They slashed their earnings projection for the energy sector (which makes up more than one-quarter of the index) by 13 per cent, while reducing their forecast for the materials sector (which accounts for 20 per cent of the index and includes gold producers) by 11 per cent.

Outside of these two big resource sectors, UBS’s earnings projections actually improved by 0.6 per cent.