US Stocks Take On Global Equities, Gold, Commodities And Bonds

• US Equities versus the world
• Stocks versus Commodities
• Stocks and bonds
• Stocks compared to gold

There are lots of seasonal reasons to be bearish on the stock market, such as September being the weakest month and mid-term election years having a downward bias. However, if you compare the S&P Composite to all other asset classes you come away with the unmistakable impression that stocks are the only game in town. Things can always change of course, but right now equities are beating just about everything.

US Equities versus the world

Let’s begin with a global overview. Chart 1 compares the S&P ($SPX) to the Dow Jones World Stock Index ($DJW). I chose this series because it acts in a similar way to my favorite world equity index the MSCI World Stock ETF (ACWI) but StockCharts has a much longer history for it than the ACWI. Most of the time, the ratio seems to move up and down with the S&P. One major exception developed between 2003 and 2007, when there was a major divergence in their paths. Generally speaking when the ratio is rising, meaning that the US market is outperforming the world, the S&P Composite is also rising in its own right. That kind of outcome is signalled by the green shaded areas, which tell us when the two series are trading above their 12-month MA’s.

It’s worth noting that both have been positive since January. Also adding to the constructive undertone, is the long-term KST for the ratio, since it has just turned bullish. Unfortunately, we have no way of knowing how long this state of affairs is going to last, but given the freshly minted KST buy signal it seems likely that it will last for quite a while.

Chart 1

Stocks versus Commodities

The S&P is compared to the CRB Composite in Chart 2. The green shaded areas draw our attention to those periods when this relationship has been trading above its 12-month MA for an extended period. This kind of environment has typically been positive for the S&P in its own right. Note that all the major bear moves, with the exception of the brief 1998 shakeout, all developed when the ratio was in a declining or sideways trend i.e. the unshaded areas. August saw this relationship move to a new post 1994 high. The only negative for the chart is the failure of the KST to trigger a buy signal. Indeed, this momentum measure calculated from the ratio has been bearish since 2016.

Chart 2

Chart 3 compares the S&P to the copper price. The StockCharts database does not include a long-term measure of industrial commodity prices, but copper is a great substitute, since its price is influenced by numerous sectors of the economy. For that reason it has earned the nickname Dr. Copper, because of the ability of its price swings to anticipate important changes in the economy.

Chart 3

Once again, the green shadings tell us when the S&P outperformed copper for an extended period. Normally this is bullish for stocks, but the three red ellipses remind us that this approach is far from perfect. Furthermore, the gray area shows how it’s possible for equities to beat copper when they both decline, as we saw at the end of the 2007-9 bear market. In that event copper dropped at a more precipitous rate than stocks.

Right now, the ratio is at a post 2003 high and its KST has just triggered a marginal buy signal. Those indications should enable equities to work their way higher as the year comes to a close.

One relationship where stocks are underperforming against is West Texas crude. It is featured in Chart 4. That ratio peaked way back in the year 2000 and touched a secondary peak more recently in 2016. It’s really been in a trading range since then. However, since the stock/oil ratio and its long-term KST are both currently below their respective 12-month MA’s, it should be interpreted as being in a primary bear market.

Chart 4

Stocks and bonds

Chart 5 examines the relationship between stocks and the price of the 30-year bond ($SPX/$USB). In this respect, the two series are much more closely intertwined than the other relationships so far considered. The trend favoring stocks is very firmly established, as this relationship continues to build on the mega breakout that took place at the end of 2016. Note also that the KST, whilst a little overstretched is still in a positive trend.

Chart 5

The ratio between the $SPX and the Barclays Government 7-10-year ETF is also in a strong uptrend, offering little indication of an imminent reversal. Indeed, the long-term KST had been stalling since the spring, but August saw a slight re-acceleration to the upside. Perhaps this is a hint of things to come.

Stocks compared to gold

The center panel in Chart 7 compares US Equities to gold. Here again, August saw this relationship move to a 12-year high, as stocks rallied and gold sold off. The stock/gold ratio recently broke out from a massive base and is now in the process of building on that breakout. This again, is good news for stocks on an absolute basis as well. In this respect, the green shaded areas flag periods when the KST for the ratio was above its 9-month MA. Without exception, this kind of condition has been bullish for stocks in the last 24 years. The KST has been in a positive mode since early 2017 but is not yet overextended. That should result, but by no means guarantees, a higher S&P and ratio.

Chart 7

None of the interasset relationships described here are perfect. However they are all, with the exception of the equity/energy ratio, pointing north. That suggests to me that equities themselves still have some life left in them despite the weak looking seasonal trend.

Good luck and good charting,
Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group of Walnut Creek or its affiliates.