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Why the commodities crush is very good for stocks

With gold, crude oil and other commodities falling, several S&P sectors have taken a big hit. But as the popular CRB commodity index drops to new four-month lows, traders say this is actually a good sign for the S&P 500.

"It's more of a concentrated weakness," Ari Wald, head of technical analysis at Oppenheimer, said Tuesday on CNBC's "Trading Nation." "We'd be staying away from these commodity-exposed stocks, but for the market as a whole, we don't think it's very bearish. We think the S&P 500 can continue to do well."

Energy stocks are down more than 10 percent for the year, while the utilities sector has fallen over 9 percent. Materials and industrials are both down about 3 percent.

But according to Wald's chart, since 1957 the S&P as a whole has actually performed better when commodities are trending lower. When the Continuous Commodity Index falls below its 200-day moving average, S&P returns increase, Wald said. When the commodity index rises above its 200-day moving average, S&P returns tend to fall.



In Oppenheimer's study, four weeks of a commodity index downtrend have historically resulted in a 0.8 percent positive performance from the S&P over that time, compared to 0.4 percent in an uptrend. In 52 weeks, the S&P's positive performance extends to 12.6 percent in a downtrend, compared to 4.6 percent in an uptrend.

"The concentration of breakdowns in the market that we're seeing right now is really a lot of energy and metals and mining stocks," Wald said. "That's really where the main weakness in the breadth data lies."

Boris Schlossberg of BK Asset Management said the savings on lower commodity prices for businesses will outweigh the negatives for energy and utility stocks as well as keep interest rates and inflation low.

"All of that, naturally, is actually positive for stocks," Schlossberg said. "Everybody from retail to services gets a huge benefit out of lower energy prices, so the net impact is actually positive."

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