Thursday, February 23, 2012

More on Commodities and Bonds

As stocks appear to be at least consolidating at this time, I'm still looking for confirmation of their recent strength from Treasuries and commodities.  Here's a ratio chart of the Morgan Stanley Commodity Related Equity Index and the S&P 500.  The Morgan Stanley Commodity Related Equity Index (CRX) is an equal dollar weighted index based on shares of widely held companies involved in commodity-related industries such as energy (e.g. oil and gas production and oilfield services and equipment), non-ferrous metals, precious metals, agriculture and forest products.  The concept behind the chart is that the ratio will show the strength or weakness of the numerator (CRX) as compared to the larger denominator (SPX) and thereby tell us whether commodities are seeing the demand needed to substantiate the thesis of a growing economy:

 We are seeing a breakout out of the consolidation triangle and the momentum indicators are reflecting strength on a short term (top) panel) to intermediate term (bottom panel).

Here's TLT (iShares Barclay 20+ Year Treasury Bond Fund):

Here we have a technical breakdown out of the consolidation triangle signaling weakness while the short term indicator (top panel) is pointing to strength and the intermediate term indicator (bottom panel) is reflecting "grudging" weakness.

I reviewed why Treasuries are showing resilience in my commentary of 2/17 (posted on this blog) but from the looks of both charts I'd say commodities are winning the "tug of war".

In the meantime, watch the Russell 2000 price action in the coming days as I believe it will tell us whether we will be seeing a deeper correction in stocks or merely the consolidation my thesis has been calling for.  And watch 1370 on the S&P on the upside and 1340 on the downside.  A break out or break down from these levels will signal another leg higher or a deeper correction.