FALLING DOLLAR BOOSTS STOCKS AND COMMODITIES -- BOND PRICES DROP AS YIELDS JUMP -- IT'S ALWAYS BETTER WHEN INTERMARKET INFLUENCES CONFIRM INDIVIDUAL CHART ANALYSIS
INTERMARKET TRENDS CONFIRM CHART SIGNALS... Last Thursday I showed some traditional charts that suggested stocks and commodities were due for a rally. In the case of stocks, a lot of global stock and U.S. stock indexes had reached important support at their mid-2010 lows and were in oversold territory. In addition, I suggested that the S&P 500 had completed the fifth wave in a five-wave decline. That suggested to me that the stock market may have put in an October bottom which should pave the way for a fourth quarter rebound. I also showed the CRB Index testing two important support lines going back a year. I suggested that was a logical spot for commodities to attempt a rebound which would also be good for stocks, and especially stocks tied to commodities like energy and materials. Today, I'd like to show how those traditional chart signals are supported by intermarket trends. Chart 1 shows the inverse relationship that exists between the Dollar Index (green line) and the CRB Index (brown line). The May commodity peak coincided with a dollar bottom. Over the last week, those roles reversed. A sharp drop in the dollar (prompted mainly by a surge in the Euro) gave a boost to commodity prices just as they were testing important support. The 50-day "correlation coefficient" below Chart 1 shows a negative correlation between the dollar and commodities since the start of the year (except for a brief period during August). Chart 2 shows a positive correlation between the CRB Index and the S&P 500 (red line). Both peaked together at the start of May and troughed together over the last week. Both benefited from the falling dollar.
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Chart 1
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Chart 2
BONDS SUFFER FROM RISING STOCKS AND COMMODITIES ... With stocks and commodities on the rise, bond prices have fallen. Chart 3 shows this week's plunge in the 20-Year Bond ETF (TLT) as the CRB Index (brown bars) has risen. There has existed an especially negative correlation between the two markets since August. Chart 4 shows the close positive correlation between the S&P 500 (red bars) and the 10-Year T-Note Yield (green line). Yields have been leading stocks lower all year, and both have dropped sharply since the end of July. That's the bad news. The good news is that stocks and bond yields have turned higher together (green circle). The point of today's charts is to demonstrate that it's always a good idea to supplement one's separate chart analysis of each market with intermarket influences from the other markets.
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Chart 3
