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Currencies, Commodities, Bonds, and Stocks - What Now?

"Lions, and tigers, and bears, oh my!" This is the famous line spoken by Dorothy in the classic 1939 movie The Wizard of Oz.


It is impossible to deny the influence of the film. The entertaining and engaging story, the numerous catchy phrases such as "There is no place like home," and I'll get you my pretty!" and the iconic song "Somewhere Over the Rainbow."


With all the commotions on the GameStop saga, the Robinhood ban, and Congress calling for the SEC to investigate the market manipulation, we turn to our phrase – Currencies, Commodities, Bond, and Stocks – what now?


The financial market is a big and confusing place. With so many different markets, indexes, and securities to follow, it can be overwhelming for investors including the most astute and experienced. Like Dorothy from the Wizard of Oz, we sometimes need Tin Man, Scarecrow, Lion, and Toto to help us stay grounded on our path (yellow brick row) to see the Wizard.


Observing the relationships between asset classes can help us better navigate the road to a successful trade or investment. Investors and traders must monitor the four primary assets – currencies, commodities, bonds, and stocks. The Intermarket analysis will help us better understand the bigger picture in the financial marketplace.


All four assets tend to work together in cycles. Some will trade in sympathy with one another and some against each other. The direction of commodity prices can affect bond and stock prices, while the US dollar and commodity prices generally trend in oppositive directions (inversely correlated). As the dollar declines relative to other currencies, this can lead to rising commodity prices as commodities trade in US dollars. Stocks and bond prices typically move in the oppositive direction. When the stock market is declining, investors and traders turn to bonds, which are considered safer investments. However, in some circumstances, both stocks and bonds can rise or fall together when the FED and central banks exert their influences in financial markets and when market conditions and the economy are distressed.


Inter-market analysis studies the relationship between asset classes. It is useful for identifying the degree of correlations between the assets. The most useful aspect of Inter-market analysis is far more simplistic. It is a way to uncover the anomalies or the divergences between asset classes alerting us to the overall health of the financial market. After all, financial assets such as the bond market tend to lead the stock market, which in turn discount US business cycles months and quarters in advance of the actual occurrence. Most important, moves in certain asset classes can convey widespread changes in investment sentiments and risk behaviors.


We will review the US Dollar Index (USD), CRB Index (CRB), 10-year US Treasury yield (TNX), and the S&P 500 Index (Index). The technical exercise hopes to uncover technical levels that can lead to crucial trend reversals and changes in investor sentiments and risk behaviors.


Currencies (US Dollar Index – 90.53)


Since 1985, the US Dollar Index has been in a structural downtrend. Although US Dollar has recovered from its 2008/2011 lows (71.80/72.93), the failure to break out above key resistance at 101.77-102.29 (61.8% retracement from 2002-2008 decline and the 2016 highs) prevented a sustainable recovery to major resistance at 105.65 (38.2% retracement from the 1985-2008 structural bear decline). The recent decline from 99.09/100.21-102.29 is approaching intermediate-term support at 88.95-89.89 (2018/2021 lows). Violation here confirms a technical breakdown and warns of the next sizeable USD downturn. However, a successful rebound from the upper-80s can lead to a technically oversold rally into the mid-to-high 90s, intermediate-term. Remember, sharply rising US Dollar trend can signal global risk aversion.

Commodities (CRB Index – 174.29)


A convincing move above the 2018 downtrend at 177 confirms an intermediate-term breakout and the start of rising commodity prices, intermediate-term. However, a breakout above the pivotal 2009 downtrend at 200 warns of the start of higher inflation, longer-term. Below 165.5 (50-day ma) signals the weakening of commodities trend, near-term. Below 143-147 (Oct 2020 lows and the 200-day ma) signals the start of a sustainable decline in commodities, intermediate-term. Rising commodity prices can lead to increasing inflationary pressure and firmer economic growth. A precipitous drop in commodity prices warns of a disinflationary or deflationary trend.


Bonds (10-year US Treasury Yield TNX – 1.057%)


The March 2020 technical breakdown below 1.492-1.458% has led to an unprecedented collapse in TNX to a historical low of 0.398% (3/9/20). From this pivot low, an equally sharp rebound has developed. The crucial resistance remains the prior March 2020 breakdown level at 1.492-1.458%. A convincing surge above this resistance signals the start of a sustainable intermediate-term recovery in US interest rates to the mid-2.0% level. Above 3.0.26-3.159% or the 2013/2018 highs suggests a structural trend change toward much higher interest rates.


However, failure to surge above 1.458-1.492% may lead to either a sideways trading range scenario or another downturn in yields. In the past, higher US interest rates have led to economic recovery or a rising inflationary trend. Lower interest rates warn of a disinflationary/deflationary trend or weakening of the economy.


Stocks (S&P 500 Index SPX – 3,787.38)


Four negative outside months developed during the 2000-2002 tech/telecom bear decline. Three negative outside months occurred during the 2007-2009 global financial crisis. In the past two years, there were two negative outside months (May 2019 and Feb 2020) and 2 outside months (Sep and Oct 2020). Nonetheless, the V-breakout above 3,393.52 (Aug 2020) confirms the resumption of the 2009 uptrend channel and suggests a test of the top of the channel at 4,072-4,229, and above this to 4,595 (V-pattern breakout target). The 10-mo and 30-mo ma at 3,363/3,048 provide pivotal supports.


Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com


Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com


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