Can Commodities Get Any Cheaper Relative To Stocks?

April 19, 2019

What inflation?

This seems to be the talk of the town these days.

Interest rates all over the world made new lows last month and have since then tried to start a recovery. We're seeing this across the developed world in the U.S., Germany, UK and Japan, among others. Meanwhile, journalists at Bloomberg Business Week decided to put a dead dinosaur on the cover of the latest issue asking, "Is Inflation Dead?"

This isn't about some silly magazine cover indicator or anything like that. My point is that I think we can all agree that we haven't seen much evidence of inflation in markets. In bonds for example, TIPS (Inflation-Protected Treasury Securities) remain relatively flat compared to traditional Treasury Bonds. Precious metals and other proxies in that space continue to grind sideways. And even in my recent podcast with Chief Market Technician at Piper Jaffray, Craig Johnson, we discussed this lack of inflationary price behavior.

This week, Stocks closed at new highs relative to Commodities. Here is the S&P500 vs CRB Index Ratio:

How much cheaper can commodities get relative to stocks?

Whenever in doubt, zoom out right? Here is the current situation when you look longer-term:

For those of you who have been reading my work for many years, you know how often these Fibonacci levels come into play. This reminds me a lot of the S&P500 in 2015, in fact. Prices stopped right at the 161.8% extension of the 2007-2009 decline.

Is this time different? Or will we get a similar outcome. Have stocks peaked relative to commodities? Is it time for commodities to have their moment and that is why momentum is diverging negatively in this chart above? Will all the jokes about inflation and dead dinosaurs on magazine covers, is it too much?

Was that low last month in rates around the world, THE low? At least for now? Is it time for rates to rally along with commodities?

I wish I knew the answer to this. Fortunately I can easily just tell you, I don't know! I did just that in a recent video.

This is what I'm thinking about over the weekend. Will this key Fibonacci extension level come into play, as it has done so many times in the past? Will the market not care about JC's lines based off rabbit reproduction math?

I look through thousands of charts and this long-term chart of the S&P500 vs CRB Index ratio is one of the most interesting I see out there. Some people will brush this off and carry on with their narrative. Others will dig in a little bit more and see if there is actually some rotation starting here.

Also, Commodities can start to outperform Stocks and both can still rise. We saw that from 2003-2006, for example.

What do you think? Am I on to something or way off? Let me know!

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