Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Commodities - The Coming Bull Market -- Ignore unavailable to you. Want to Upgrade?

To: Gofer who wrote (676)	8/14/2001 10:04:14 AM
From: Moominoid	Respond to of 1643

People in devloping countries like India buy jewelery as a savings vehicle, so I guess they combine both trends?

To: Gofer who wrote (676)	8/16/2001 2:49:58 PM
From: craig crawford	Respond to of 1643

THE BRIDGE/CRB INDEX AS AN INTERMARKET INDICATOR thenyfe.com By John Murphy CRB INDEX LINKED TO DOLLAR INDEX Since commodities are quoted in U.S. dollars. the direction of the dollar has an influence on commodity prices. Chart 4 demonstrates that influence by showing that a rising dollar had a negative impact on the CRB Index from the start of 1996 to the summer of 1998. Generally, a rising dollar is negative for commodity markets while a falling dollar is positive. To the upper right of the chart, for example, the Dollar Index starts to drop sharply at the end of the summer of 1998. At the same time, the CRB Index is starting to rebound. In the period from July 1997 to July 1998, the dollar rally was caused primarily by a flight from global currency markets that started in Asia-the same deflationary trend that pushed commodity prices lower. Increased talk about a potential rate cut by the Fed this September to head off deflationary trends contributed to the sell-off in the dollar and the corresponding bounce in the CRB Index. Lower U.S. interest rates weaken the dollar and boost commodities. CRB FALL AFFECTS NYSE COMPOSITE (Chart 5) The trend in the CRB was also being watched closely by stock market traders. As commodity prices plummeted to the lowest level in five years, stocks began to react negatively to the increasing danger of a deflationary breakdown in the CRB Index (which contributed to a flight into the safety of Treasury Bonds). During August, the CRB Index slipped below the 200 level, its lowest level in 20 years. The publicity given to that breakdown in the CRB Index was one of the factors accelerating the sharp stock market slide that started in the NYSE Composite Index the month before. Up to that point, falling commodity prices had been viewed as a positive indicator of lower U.S. inflation, which is usually good for stocks. The threat of commodity price deflation, however, changed that positive view of falling commodity prices into one that was potentially negative for the stock market. BRIDGE/CRB INDEX AT CRUCIAL POINT Chart 4 showed the slide in the U.S. Dollar Index pushing the CRB Index back above the 200 level. Chart 6 shows why the 200 level is so important for the CRB Index. The CRB Index peaked in 1980, ending the inflationary spiral of the 1970s. The index hit a bottom in 1986, which began a sideways trading range that has lasted for twelve years. The 200 level was tested again successfully in 1992, confirming its role as a major support level. In 1998, the CRB Index is once again testing that critical chart support. It fell below 200 during the last week of August, before climbing back above that level during September (with some help from a falling dollar). Whether or not the CRB Index stays above that support level has major implications for all financial markets - not just commodities. The ability to rally from the 200 level would give a boost to commodity markets and, at the same time, would probably cause some profit taking in bond prices. The diminished deflationary threat could also give a boost to stock prices. The bounce in the CRB Index would probably coincide, however; with a weaker Dollar Index as a result of an easier monetary policy by the Fed. A collapse in the CRB Index, however; would have exactly the opposite meaning: bearish for commodities and for stocks, but positive for bonds and the dollar. Never in its history has the CRB Index played such a crucial role as an intermarket indicator, and never before has so much ridden on whether it holds at critical chart support CRB HEDGE AGAINST INFLATION OR DEFLATION Traditionally, futures and options on the CRB Index have been considered useful, primarily as a hedge against inflation. That would have been the case during the inflationary binge of the 1970s and, to a lesser extent, during the milder upturns in inflation that started during 1986 and 1992. This past year; however; has produced another reason for using CRB futures and options - as a hedge against commodity deflation. With the CRB Index testing a major support level, it has the potential for moving in either direction. An aggressive Fed policy of easing interest rates, increases the odds for some commodity inflation. On the other hand, if the Fed acts too slowly or less aggressively, the scale will tilt back toward the threat of commodity deflation. Either way, the availability of CRB Index futures and options enables the trader and the hedger to guard against either eventuality or; even better; to profit from it. CONCLUSION The forty-year history of the Bridge/ CRB Index has provided a strong track record of reliability in measuring inflationary and deflationary trends in the commodity markets. While the Goldman Sachs Commodity Index provides some of the same functions, its heavy weighting in the energy markets leaves it open to distortions caused by oil market shocks and renders it less useful as an intermarket indicator. Over the past year; declines in the CRB Index mirrored the deflationary trend that started in Asia before spreading to Russia and Latin America. The CRB Index showed a strong inverse relationship with bond prices and the dollar during that period, and may play a crucial role in deciding the fate of the U.S. stock market. During the recent period of global financial turmoil, the CRB Index once again demonstrated its value as an intermarket indicator. The existence of CRB Index futures and options is an added bonus, and provides traders and hedgers with vehicles to capitalize on its intermarket signals. (excerpts)