Inflation Pressures: As Low As You Can Go!
A composite indicator constructed from the trends in yields on the 10 year Treasury bond, gold and the CRB Index suggests that inflationary pressures have hit their extreme lows. The indicator is shown in figure 1, a weekly chart of the SP500. I last discussed this indicator and its significance in this recent article.
Figure 1 SP500/ weekly
This indicator is not meant to be an oscillator type of indicator that rises and falls with prices. However, since 2009 or rather in this era of central bank intervention, markets have been highly correlated leading to “risk on” and “risk off” periods. This indicator has done a good job of defining those “risk on” and “risk off” periods. With the indicator falling, we have clearly entered a “risk off” phase. As the gray vertical lines show and since 2009, the equity markets have tended to bottom when this indicator made extreme lows. The indicator is now at one of those “extreme lows” as lower yields on the 10 year Treasury and lower commodity prices appear to be signaling economic weakness. This should clear the way for a trade -able bottom provided investor sentiment turns a lot more bearish (i.e. bull signal).
“Wash, rinse, repeat!”
Category: inflation
This should clear the way for a trade -able bottom provided investor sentiment turns a lot more bearish (i.e. bull signal).
Are you giving up your 14% drop target? I think emphasis should be given to sentiment. I mean: how predictive is this indicator of market tops, when sentiment is bullish and how predictive is it of market bottoms when sentiment is bearish?
Turtle:
1) I would go with sentiment
2) But I make clear that this indicator should not be viewed as an oscillator in the sense that it is tracking price
3) I do use the indicator in one of the trading strategies and this is primarily to define a rising yield, increasing inflation pressures type of syndrome that is a major head wind for equities
I see that this relationship did not work in 2008 and early 2009. Seems pretty inconsistent.