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!”