Major Intermarket Relationships Shifting

Jul 30, 2008: 8:55 PM CST

If you’ve been keeping an eye on the major news or trends in the major markets, you may have noticed a not-so subtle shift that’s clearly taken place.  Let’s see what that shift is and what it might mean for the future.

First, let’s look at the following markets and their performance since the start of 2008:  S&P 500 (blue), Crude Oil (black), Gold (gold/yellow), 10 Year Treasury Yields (Brown), and the US Dollar Index (green)

The price of crude oil skews all other markets on this chart, and without it we may have a clearer relative picture, but the price of a barrel of oil has been so important to the broader markets that we can’t logically skip it.

You can view the chart for more insights at your leisure, but I want to focus on what’s happened since the blue dotted line in mid-July for the remainder of this post.

Oil peaked, the stock market bottomed, gold (temporarily) peaked, and the direction of the US Dollar and yields began to rise.

We can expect this from our collective understanding of intermarket relationships (as taught by Martin Pring, John Murphy, and many others).

A strong dollar is bad for commodities.
Rising yields (falling bond prices) boost the US Dollar Index.
In this environment, the stock market would prefer commodity prices to fall, and the dollar to strengthen, thus it is getting a boost.

It’s difficult to know what caused what (the proverbial “chicken or the egg”) but it’s just as important to know what’s happening and what might be in store.  It’s also important to determine whether this current shift is a true reversal or a mere correction in the larger trends – it could be too early to tell, but if it is truly to be a reversal, now would be the time to keep your eyes open to the possibility that broader market trends may be shifting – at least for the time being.

Now, let’s zoom in on this shift and look at price performance since May 2008:

The shift becomes abundantly clear here.  Around July 14th, “everything changed” (at least for the moment.  Crude and Gold (commodities) plunged, the Stock Market eeked out a temporary bottom, and the direction of the 10 Year Yield and the US Dollar changed abruptly – all playing out to the broader script of intermarket expectations.

I like to envision these markets as a broader, inter-related game of chess (sometimes even 3-D chess), where moves in one market will directly affect another market.  It’s often difficult to discern the causes, but once a piece is in action, one can properly anticipate the current and potentially future moves in subsequent markets.  One can also use the structure for confirmation/non-confirmation (to see if what’s happening in one market is in line with expectations).

Do your own analysis on these markets to see if what we’re witnessing is a significant change, or just a retracement against strong, established, underlying trends – time will tell.  Do be aware that an asset allocation position shift may be ahead.

5 Comments

5 Responses to “Major Intermarket Relationships Shifting”

  1. GTM Says:

    Great work! If you find out why gold has lagged so far behind oil leme know. I have a theory but it’s probably too crazy to publish.

  2. Anonymous Says:

    If Ben keeps printing Money then yes perhaps there will be a shift in trend but if the dollar remains at current levels theres no hiding from the bear. Consumer confidence is getting lower and lower here in Europe. Lates inflation figures announced at 5.1% annualized up from 4.3% last year. I note your bullish on Gold but that can only mean a weaker dollar brought about by the headlines one has come to expect and with it comes all the attending “investors” suffering.

    That being said ” eyes wide open “.

  3. Jeff Pierce Says:

    One other chart you could of analyzed was FXE, which is the euro. One could have seen the double top forming which would have been bullish for the dollar, and bearish for gold. We seem to be at a crossroads where we’ll see if the primary bull trend in oil will continue which will affect all the markets. Oil looks weak today, but when oil moves it moves fast.

  4. Richard Bellingham Says:

    [resubmitted from an email due to a comment posting error]

    Corey, your chart is most helpful and timely.

    On July, 15, the yen carry traders sold oil, USO, to take profits and go long the bank, investment bankers, and stock brokers — very shrewd.

    This caused a sell off in gold, GLD.

    And the interest rate on the 30 year US Treasury Bond, $TYX, rose as concern grew over the Fed lending to and capitalizing the GSEs.

    And the really big news is that the EUR/JPY, the barometer of the yen carry trade, fell lower today as currencies across the board sold off, with the exception of the Yen which rose by a tiny amount.

    The yen carry trade unwound on the sell off of the currencies. So we have passed through ‘Peak Currencies’.

    Falling currencies are going to cause disinvestment from stocks world wide.

    And now with oil rising today, the US dollar traded basically unchanged; and the rally in stocks may have stopped. I believe we have reached ‘Peak Dollar’.

    Gold fell with currencies, but rose during the day as oil rose.

    Gold is rising to be the defacto world currency and means of garnering and preserving wealth.

    Your article ‘Gold Takes An Unexpected Swing’ provides the chart of gold, $GOLD, manifesting an outbreak from former consolidation, with $890 forming a strong base of support. So even though gold did fall today, it still is in a bullish run.

    Your gold charts are really helpful, so please keep them coming.

    My full thoughts are in my article

    Peak Dollar

    http://my.opera.com/richardinbellingham/blog/2008/07/31/peak-dollar

    Best To You

    Richard Gorton

    Resourceful Bear

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