Inter-market Relationships that are Driving the Stock Market and Commodities

By: Toby Connor | Mon, Aug 20, 2012
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This will be a quick post today discussing what I expect over the next 2 years, and the inter-market relationship between the currency markets, CRB and stocks.

Pay particular attention to the inverse relationship between the dollar index and the CRB; notice how the CRB almost immediately began moving down into its three year cycle low once the dollar formed its three year cycle bottom in May 2011.

Stocks are driven by not only the dollar but to some extent by commodity prices. When commodities start to surge too high they act as a drag on the economy and consequently the stock market begins to stagnate. When commodities are falling, as they have been for the last year, it tends to act as a mild tailwind for the stock market and this explains why stocks have continued to rise for most of this year despite the dollar moving generally upwards since February.

I think I've mentioned before that virtually every recession since World War II has been preceded by a spike in oil prices of 80% -100% over a short period of time (usually a year or less).

The surge from $50 a barrel to $100 in 2007 was the straw that broke the camel's back and tipped the economy over into recession, which began in November`07. A further spike to $147 a barrel the following summer guaranteed that the recession would be the worst since the Great Depression, especially considering that the real estate market and debt bubble were imploding at the same time.

Now that the CRB has formed its three year cycle low the dollar index should be at or pretty close to a final top, which should then be followed by a move down into its next three year cycle low due sometime in 2014.

If the inter-market relationships continue to hold up, and I don't see why they wouldn't, then we should see commodity prices moving generally north for the next couple of years until the dollar forms its 3 year cycle low in mid-to-late 2014. At some point along the way rising commodity prices are going to begin pressuring the economy, just as they did in 2007 and 2008, and also in 2011 as the CRB surged up into its final three year cycle top.

$SPX (S&P 500 Large Cap Index) INDX

My current guess is that we will see the stock market start to stagnate in 2013 while forming a much extended rounded topping pattern. By late 2013 the stock market should be clearly in a new bear market that will begin to accelerate to the downside as commodities spike into their final top and as the dollar bottoms in 2014.

At that point I expect to see a severe deflationary event as the stock market and commodities collapse similar to what happened in the fall of 2008 and early 2009. This collapse and deflationary event should be accompanied by the dollar rallying out of its next three year cycle low in 2014.

Most bear markets tend to last between 1 1/2 to 2 1/2 years so we can probably expect a final bottom in early to mid-2015.

 


 

Toby Connor

Author: Toby Connor

Toby Connor
Gold Scents

Gold Scents is a financial blog focused on the analysis of the stock market and the secular gold bull market. Subscriptions to the premium service include a daily and weekend market update emailed to subscribers. If you would like to be added to the email list that receives notice of new posts to Gold Scents, or have questions, email Toby.

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austrian-money-supply/