A composite indicator constructed from the trends in yields on the 10 year Treasury bond, gold and the CRB Index suggests that inflationary pressures should be a non-factor for the equity markets. 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 recently hitting extreme lows and having turned up, it appears that the markets have entered a “risk on” phase.
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A question that I am often asked is if I use these indicators in my own trading strategies. The answer for this inflation sensitive indicator is “absolutely yes”. The indicator finds its greatest utility when it is elevated to an extreme level. In other words, when inflation pressures are high, equity prices tend to under perform to a significant degree. The rest of the time finds that inflation pressures are not a headwind for equity prices.