Thursday, April 3, 2008

Equities or Commodities?

Ever since the bear market of 2000-2003 found a bottom and started up, equities and commodities have largely been moving up together. That relationship came to an end when the equity markets topped in mid-October. Since then, as the first chart below indicates, the SPX has been falling while the Reuters/Jefferies CRB Index of commodities has been on the rise. While the direction of these indices has recently changed, the inverse relationship appears to be holding up. The SPX and CRB chart below shows that commodities turned down about two weeks ago, just before the equity market bottomed.

A quick and dirty explanation for this change might be that speculative money started getting out of equities last August and September as the market topped, concerns were raised about the credit markets, and the Fed started cutting rates. The Fed’s actions clearly caused many investors to be more concerned about inflation and pushed them in the direction of assets – such as commodities – that have historically performed well in an inflationary environment.

In addition to the SPX and CRB chart, I have also included a six month heat map, courtesy of, which shows in dramatic fashion, that commodities have been one of the few areas of strong performance during the past six months.

As financial firms de-leverage, it is possible that speculative bets will be limited to equities or commodities, but not both, so it is important to watch which asset class is soaking up most of the money currently on the sidelines. I will update this story as it unfolds.

[graphic: StockCharts]



Anonymous said...

congratulation for the prediction of this rebond ... but negatif as i am I still find that the vix doesn t react as normal .... do you think that can have a relation with this resistance we didn t past ? to confirm this duble butom ? For me the vix still very high after a rebound like of like that .. should mean that the bear market has just star ?? what do you think ?

Anonymous said...

punky trader ..

Bill Luby said...

Hi punky,

By some measures (i.e., VIX:VXV), the VIX is getting a little too low; but by other measures (using Bollinger Bands or the 10 day SMA), the VIX readings are a little less extreme than they were three days ago.

For today's action, I am most impressed by the market's ability to shake off bad news and an initial move down, then rally sharply.

The day isn't over yet, but today certainly looks like it is going to be another victory for the bulls.



Anonymous said...

yes very strong ... but not enough to break this res. and confirm this duble butom. for me the market is doing exactely the same move on bad news we had a the first rebond it looks like noby is ready to buy the market at this level... will see that on monday for me the market are not strong enough to continue this raly and the vix is very low compare to the situation of the news and economie..

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