Cyclical Analysis: Let’s conduct a medium-term Intermarket Analysis to assess potential trends over the coming weeks for the CRB Index, Dollar Index, T-Note, and S&P 500.
By Eugenio Sartorelli – www.investimentivincenti.it
Copyright DMF New Media – ETFWorld.co.uk
Reproduction prohibited in any form, even partial
Through Intermarket Analysis, we aim to understand the relationship between the three major asset classes—Bonds, Equities, and Commodities—which dictate the timing of various phases in the U.S. economic cycle.
We begin with the trend of the CRB Index (red line, right scale) and the Dollar Index (black line, left scale), updated as of the July 30 close.
The chart data is daily and on a logarithmic scale, starting from June 2024. At the bottom is the correlation coefficient calculated over 63 data points (equivalent to 3 months).
This correlation should typically be negative because commodities are priced in dollars. When the dollar weakens (Dollar Index declines), non-dollar-based buyers tend to increase commodity purchases (i.e., build inventories) due to favorable pricing. Conversely, a strong Dollar Index discourages inventory-building for those using other currencies.
Naturally, this isn’t universally true for all commodities, as supply and demand factors also play a role.
What this chart reveals, however, is a predominantly positive correlation—only recently turning more negative. Since mid-May (see red arrow), the Dollar Index has trended downward while the CRB Index has risen.
Clearly, policy decisions by the new U.S. administration have impacted this intermarket behavior. Considering multiple factors, the Dollar Index may strengthen (e.g., due to tariffs favoring the U.S. trade balance), while the CRB Index could stall, halting the price growth of many commodities.
Now, let’s examine the correlation between the S&P 500 (red line, left scale) and T-Note yields (black line, right scale)—both on logarithmic vertical scales:
In classic Intermarket Analysis, these two markets should exhibit a slightly inverse relationship. Higher bond yields offer managers a less risky, sufficiently lucrative alternative to equities, leading them to underweight stocks when bond yields rise (and vice versa).
Inflation expectations and central bank rate policies also influence this dynamic.
As shown, the 3-month correlation (bottom line) alternates between phases. Recently, it has been slightly positive but at very low levels. A deep dive into the reasons would be highly complex.
Notably, since mid-April (see red arrow), T-Note yields have lacked a clear trend, oscillating between 4.2% and 4.5%, while the S&P 500 Index has steadily climbed.
Projecting intermarket trends based on this chart is challenging. As with the CRB-Dollar correlation, we’re in a statistically atypical phase. T-Note yields may continue drifting directionless, while the S&P 500 could maintain its bullish trend. This doesn’t preclude partial corrections in the S&P 500, which would align with consolidations within its upward structure.
Copyright DMF New Media – ETFWorld.co.uk
Reproduction prohibited in any form, even partial
Disclaimer
The contents of these notes and the opinions expressed should in no way be regarded as an invitation to invest. The analyses do not constitute a solicitation to buy or sell any financial instrument.The purpose of these notes is financial analysis and investment research. Where recommendations are made, they are of a general nature, are addressed to an indistinct audience and lack the element of personalisation. Although the result of extensive analysis, the information contained in these notes may contain errors. Under no circumstances can the authors be held liable for any choices made by readers on the basis of such erroneous information.erroneous information. Anyone deciding to carry out any financial transaction on the basis of the information contained in the site does so assuming full responsibility.
Subscribe to Our Newsletter