Technical Analysis Report: Examining macro trends

With fears of a double-dip recession growing, and volatility being the rule of the day, The Northern Miner thought it would be a good time to take a macro view of where markets may be trending.

Within the world of technical analysis, one of the best tools to gain such a broad view is intermarket analysis.

Intermarket analysis seeks to determine the trend in global markets by examining the relationship between different markets — mainly the currency, bond, equities and commodities markets.

The basic tenet of intermarket analysis is that all markets are interrelated and do not move in isolation. What is more, the most often used method to study this interrelation by professionals is technical analysis.

Of particular interest for mining investors is the fact that a great emphasis is placed on commodity markets in such studies.

The reason for this is commodities are generally the first group to respond to rising or decreasing inflationary pressure and thus serve as a leader in the chain of events that affect bonds and stocks.

Turning to a host of charts that cover specific commodities within the commodities market and specific sectors within the equities market, and looking at the key bond index, what is immediately evident is that the suspicion that we are living in odd times is easily confirmed.

What else to make of the fact that from December 2009 all the way until June 2010, the U.S. dollar and the gold price were marching in tandem up the charts? Or the fact that the relative strength of the Commodity Research Bureau (CRB) index compared to the S&P 500 actually fell along with a falling dollar through much of 2009, again going directly against what has historically been the case.

Since June, however, the historical inverse relation between gold and the U.S. dollar, at least, has been re-established with gold continuing to climb and the dollar falling off.

If that trend continues, some positive momentum for gold and commodities could be coming.

That is because gold is seen as a leading indicator for the direction of the CRB index, which tracks a broader basket of commodities. The CRB index has been tracking slightly downward since the beginning of the year, so if the historical relationship holds true, things could be improving for commodity investors.

On the other side of the coin, however, is the historical relationship between the CRB and U.S. bond prices, which traditionally have an inverse relationship. The CRB is considered a leading indicator for bond prices, so as it tracks higher, bond prices should fall.

That relationship has held up since the start of 2010, although it has not been going as bullish as commodity investors would like it to. While the CRB has been on its moderate but steady decline, bond prices have soared since April 2010 with the 30-year U.S. Treasury bond price index moving from 115 points to 135 points.

Intermarket analysis theory states that bond prices are a leading indicator for equities, so following that, this could be read as a bullish indicator for equity prices.

What is bad news for commodities like gold, however, is that rising bond prices occur in a disinflationary environment. That disinflation means lower yields, which is a stimulus for stock groups such as financials, basic industries and utilities — in short the sectors that perform well in a disinflationary environment.

Such a scenario would of course undermine one of the chief reasons to buy gold — mainly as a hedge inflation.

It should be noted that the same charts support the widely held thesis that we have moved out of a prolonged disinflationary environment in 2002 and into an inflationary period which amounts to a secular bull run for commodities. Such cycles have historically lasted between 15 and 20 years, so using this line of reasoning, there should be plenty of legs left in the commodities story.

If that thesis holds true, then the recent rise in bond prices and all the fears of disinflation being disseminated in the media could turn out to be little more than a temporary blip on the charts. One that investors long on commodities will have to sustain until the CRB begins its march upward again.