Throughout the week I will cover each individual asset class: Bonds, Stocks and Commodities, while intertwining the US Dollar.
The main point I want to express with the following charts, and over the next couple of days, is that major trend changes are taking place. These are not short or intermediate-term trends, but rather long-term trends. Ones that may play out for years to come, not weeks or months.
Major changes in trend can be seen in each individual asset class on an absolute basis, and that is something I will cover in the coming days.
Today, I would like to zoom out and focus on a few ratio charts to help put the current and developing shifts in the market environment in perspective.
First, let's look at the Commodity/Bond ratio. I mentioned the broad implications and importance of this ratio in a post earlier this month. The chart is all about the reflation trade, and it recently broke a 9-year trendline.
This signals a major shift in the intermarket picture. One that points to higher rates and global growth, but also depicts an environment that favors a move away from the safety of US Treasuries.
We are at the beginning of a shift that could provide ample opportunities to ride the primary trends supported by commodities outperforming bonds.
Commodities aren't the only asset class poised to outperform bonds, so are stocks. Two things stand out in the Stock/Bond ratio below:
The pattern of the ratio line contracting and pulling back before expanding and heading higher. It appears the ratio line is on the verge of the latter.
The ratio peaked in 2018 around the same time as global risk assets. Now as risk appetite increases around the globe, it appears stocks are ready to outperform their safer alternative.
Again, we are at the beginning of a major shift away from bonds.
It stands that bonds are set to underperform across the board. The question is whether or not bonds will roll over on an absolute basis, setting in motion a classic intermarket picture of bonds leading stocks and commodities through major peaks and troughs.
Though it is expected, it is still unseen. I find the relative strength in stocks and commodities impressive, given that bonds continue to chop sideways.
Another important ratio is stocks relative to gold. I believe this chart is heavily influenced by the US Dollar. They look incredibly similar. Usually USD weakness is a headwind for domestic stocks, while fueling commodities and emerging markets.
I don't know how much US dollar weakness will affect stocks in an environment that rewards buying stocks and selling bonds. I believe we could see USD weakness and a falling Dow/Gold ratio while both gold and stocks remain in uptrends.
When I study momentum or any other indicator aside from pure price action, I'm searching for a deeper understanding of the market environment, not a trade signal. I think of these indicators and studies as weather reports, helping prepare myself before leaving the house. Do I need a jacket? Do I need an umbrella? Do I really need to leave the house?
I think of intermarket analysis, especially within the broader scope presented here, as an indication of the season. We're not going to bundle up and run outside to play in the leaves in July or August. No, we're throwing on sunblock and heading to the beach.
Same idea here. I don't want to think about owning Bonds when Stocks and Commodities are beginning to outperform in a major way. It's simply not the right environment.
Money is going to flow where it is treated best. It is our job as technicians and market participants to pick-up on major trend changes as soon as possible, and to exploit the primary trend for all that it's worth.
The markets are telling us that its starting to warm-up out there. Now we just need to prepare accordingly.
Thanks for reading! If you have any questions or comments, please feel free to contact me at ianculley@culleycharts.com
DISCLAIMER: All information and opinions expressed by Culley Charts are strictly that, and should not be construed as investment advice. Market participation comes with inherent risk, and the responsibility of managing this risk lies solely with each individual investor.