- In Trade Chatter
- Last Updated: 07 December 2012
- By LA Little
There is a lot of material available to anyone who seeks it about the market cycles overlaid on the economic cycles. Rationally they make sense. At the beginning of an economic upturn one would expect basic materials to rise for example since if you are going to build things you need basic materials like minerals and matter.
When on looks at a chart over the past several years, the relationship is evident. Here's such a chart that I picked up in a link from my good friend Charles Kirk a few days back which originated from the Commodities Research Bureau. What this chart says to me is that the correlation is there and, that at times, the correlation breaks down with one side or the other clearly giving off false signals. We have broken down over the past year in my opinion with the stock market walking higher while commodities are on life support.
Now its too easy to look at a chart like this and say to yourself oh, we are going to see equities crash near term or some sort of nonsense like that. This isn't a timing mechanism - it's simply an observation that the world economies are not growing robustly. If they were, then the demand for basic building stuff would be higher. It just isn't happening.
Does that mean we can continue to see equity prices lift in spite of that? Well, they have for more than a year now in the face of a slowing commodity market so I don't see this as something that you can use to time an exit from or a shorting of the stock market. It's just an observation of a long term correlation that is out of whack. One side is simply wrong with respect to this relationship. What it also says is that this clearly isn't the only factor that affects stock prices. Things like the infinite intervention by central banks for example is a huge factor.
Today we get the employment number. It is likely to poor. That is expected and it would not surprise me to see this market take it in stride as it does everything else and hang at these highs into next week where the Fed gives out more gravy and the boys on the hill try to solve their cliff problem. Time is starting to run out on them though!