We’ve spent some time in the past discussing the very powerful technique of using ratio analysis to watch for rotation and inter market strength when comparing various assets classes or single instruments to others within their sector/market.
We’ve also shown that patterns can and do work in ratio analysis.
That being said, we are getting a bit one sided (to the bearish side) with regards to Crude Oil, precious metals, and select commodities. So, let’s take a basket of commodities and use the CRB Commodity Index to perform ratio analysis against the broadest index of overall stock market performance – the New York Stock Exchange Index (NYA)
The CRB Commodity Index components can be found here.
A description of the New York Stock Exchange Index (NYA) can be found here.
If we look at the chart below we see a very powerful PATTERN developing … a butterfly buy pattern (long-term) has emerged on the ratio of the CRB/NYA. What does that mean?
- Again, it’s only probability, but if this pattern is complete (and holds), then the relative strength of select components of the CRB “should” start to outperform on a relative strength basis.
- And might this mean for stocks? See the second chart below. It’s a mixed picture. If we look at the 2007 top we can see that the index bottomed and started up strongly as stocks sold off but then the CRB index also topped and began a now 7 year bear market. Is there rotation in/out of the NYA at major inflections? Yes, but it’s not a “sure bet” that as the Commodity Index outperforms that stocks will go down.
In sum, pay attention to the CRB over the coming days/weeks. The low that the CRB/NYA ratio made in mid-March 2015 is a very important level based on the pattern that completed. Whether it holds or not will likely have major implications for the market.
Stay tuned and thanks for reading.
Twitter: @BartsCharts
Author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
