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.