Commodities and bonds
Commodity prices are important thanks to being one of the main indicator of inflation.
Commodity markets trend in the same direction as the treasury bond yields. That’s something important to understand and glue to the back of your head. Also that bond yields and bond prices trend in opposite directions. So CRB index and bond prices are usually in the opposite trends.
When talking about Forex (EUR/USD) then usually forex and treasury bill bonds are moving in the same direction. So when trading with EUR/USD, often analysing the chart of Treasury bill bonds gives some good additional information.
Bonds and Stocks
Stock market is a influenced a lot by interest and inflation rates. Often, rising interest rates (rising bond markets) means bullish market for stocks. And it’s also important to remember that bonds market often makes its move first. If some sort of different move from the stocks market is seen in the bonds market, it’s time to be cautious in stock markets as there’s a good chance that stock index will be turning soon as well, it might often take months, but usually stocks follow. Often though, correlations between the two markets can also be seen day-to-day basis. If you’re not really analysing bond markets when working with stock markets, you should at least be monitoring bonds as well, and to compare the two indexes.
Commodities and US Dollar
Often, rising dollar is considered bullish for stocks and bonds, but not always. It holds up more if compared to commodities market. In easier words – stock market is sensitive to bonds market (interest rates); The bond market is influenced by commodities market (inflation expectations). And the inflationary impact of commodities is determind by trend of U.S Dollar. So it’s a long relationship – US Dollar to commodities, commodities to bonds and bonds to stocks.
Rising dollar produces lower commodity prices which lead to higher bond prices (lower interest rates) which leads to higher stock prices.
Note that gold is the most sensitive to US Dollar and due to that fact gold market leads turns in the CRB Index. So rising dollar means almost immediately falling gold price and vice versa. The same workings are also visible when comparing US Dollar to foreign exchange. When US Dollar falls, foreign exchange rises. Gold and foreign exchange should be moving in the same direction.
Gold usually leads turns in the CRB Index by about four months (most commonly, but can be up to a year).
US Dollar, interest rates and stocks
Note that though we can compare US Dollar to bonds or stocks directly, it is often still more advisable to do that via commodities as comparing it directly is merely a shortcut. And in case of shortcuts there might often be longer lead times and thus it might not be as effective as it could be.
Generally speaking, if we try to compare stock market and US dollar then there definitely is a link between them, but like mentioned a few lines above, long lead times may be encountered meaning that it doesn’t provide you too good buy nor sell signals.
Rising dollar pushes inflation and interest rates lower which is bullish for stocks. And the opposite – falling dollar eventually increases inflation and interest rates, thus is bearish for stocks. So the way I understand it, link between stocks and US Dollar does exist, but in order to see it without too long lead times and to make sure you’re on the right track, you shouldn’t take any shortcuts but rather also check the inflation and interest rates and only after that make your conclusions.
Sometimes, when looking at US Dollar index and DOW index then you will notice that US dollar and stocks are moving in the opposite directions, you notice something that you wouldn’t have liked to notice – as generally speaking, stocks and dollar should be going in the same direction. But this again is often not a disagreement between the two markets but is rather caused by lead and lag times. They are going in the same direction, but with a 4 – 12 months delay. And this information doesn’t usually help you, right? Well, I think it’s right. So to make this link between stocks and dollar a more practical one you do need to look at interest rates and inflation as well. Rising dollar becomes bullish for stocks ONLY after commodity prices and interest rates start to decline.
Note that these links still, to me, seem more like of a lot use to long –or mid-term investors rather than short term traders as there are always some kind of lead times etc and often it’s very difficult to make such conclusions day-to-day bases.
Keep in mind the GOLD
Gold is one of the most important elements of the intermarket analysis because it’s leading indicator of inflation. And the expectations of inflation often stem from the direction of the gold market. John Murphy sas that „Gold doesn’t react to inflation, it anticipates inflation”.
CRB Index consists fo 21 component markets and as brought out above, has a very important role in intermarket analsis – this is the main commodities index. There are also indexes like CRB futures index, CRB spot index (Spot Raw Industrials and Spot Foodstuff index is included here), Journal of Commerce Industrial Materials Price Index.