Commodity Charts Help with Stock Trading
In our experience, for any serious move to get underway, the Bond, Commodity and Equity markets have to be aligned. That is about to happen shortly...
I've had the good fortune of meeting many Excellent Investors. Some were equity men and women, others were commodity and still others fixed income. I've also met a few who are a combination of all three but they are few in number!
Each discipline requires a slightly different way of viewing the world. Bond men like rising unemployment and a weakening economy which push interest rates lower. Equity men like strong growth and low input costs. Commodity investors favor outright inflation. Needless to say they often disagree, but for any serious move to get underway they have to be somewhat aligned. Case in point is the fixed income and equity markets...
Chart 1 - S&P vs. Credit Spreads
The above chart shows the spread between investment grade bonds and Treasuries (blue) versus the S&P500 (red).
It is interesting to note the close correlation.
When the blue line is rising it implies that fixed income investors prefer riskier investment grade bonds to safer treasuries. This same risk appetite is evident in a rising S&P which closely mirrors the movement in credit spreads.
Framed in this context it is clear why the flight to Treasuries (blue line falling) coincided with a viscous sell-off in equities and why it is important for credit spreads to stop widening (blue line stops falling) before a sustained bottom can be put in the stock market.
Here's the way a commodity guy views the same scenario:
Chart 2 - Silver: Gold ratio vs. S&P500
For some reason unbeknown to us there seems to be a very strong correlation between the S&P (red) and the Silver: Gold ratio (blue). At first thought this correlation seems coincidental but on further analysis one would realize that Silver tends to be more economically sensitive than Gold. Silver has industrial uses as well as monetary and its price is subject to similar economic forces as say S&P companies. Gold on the other hand is counter-cyclical in that it performs best in worsening economic conditions. Hence the correlation may not be so difficult to understand after all.
During the recent sell-off in the stock market Silver vastly underperformed Gold (the chart fell). At current levels it takes 52 ounces of Silver to buy 1 ounce of Gold (the historic ratio is closer to 20). Aside from Silver being ridiculously cheap, the above chart also shows close correlation between the Silver: Gold ratio and the S&P -- recent strength in Silver versus Gold should bode well for the Stock Market.
The commodity and equity markets now look to be in synch (Dr Copper says shallow economic recession).
Someone should tell the Fixed Income boys that Corporate Investment Grade bonds may soon outperform treasuries due to credit upgrades (select large cap non-financial companies have exceptionally strong balance sheets).
Once credit spreads start to narrow, the stars will align for a decent sustainable rally in the Stock Market.
More commentary and stock picks follow for subscribers...
I am an investor and newsletter writer specializing in Junior Mining and Energy Stocks and small caps listed in the US, Canada and Australia.
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