Trading with Intermarket Analysis

CHAPTER 12

Stocks and Commodities Become Highly Correlated

This chapter discusses the close correlation between stocks and commodities over the last decade, and especially since 2008. The deflationary impact of the housing collapse tightened their correlation even further. Copper influences stock market direction. So does the silver/gold ratio. Silver stocks led the commodity lower in spring 2011. Crude led energy shares lower. Commodities turned down before stocks during 2011. The commodity peak also influenced sector rotations. Gold‐miners have underperformed bullion since 2008.

■ Another Side Effect of the Deflationary Environment

An earlier chapter discussed two events that occurred during the 1990s that contributed to the deflationary climate that has characterized the first decade of the 21st century. One event was the collapse in the Japanese stock market during 1990, which led to a deflationary spiral in that nation’s economy. The second deflationary event was the Asian currency crisis that started during 1997 that helped change some key intermarket relationships that still exist to this day. One of those changes was the decoupling of bond and stock prices. Prior to 1998, rising bond prices were positive for stocks. After 1998, rising bond prices usually led to falling stock prices.

The second intermarket change was a much closer linkage between the trends of stock and commodity markets. Both of those intermarket changes were reminiscent of trends that existed during the ...