At the Crossroads?

BarroMetrics Views: At the Crossroads?

In the weekend video, I made the point that the markets may be at a crossroad: many of the inter-market relationships appeared to be breaking down. In the past two or so years, the US$ has been inversely correlated to the US stock market and commodities.

Prior to last week, we could count (generally) on almost instant reciprocity in the US$/US Stock-Commodity movements. But last week we saw Gold and Soybean go up strongly (Oct 2 and Oct 5 respectively)  with a muted downside response from the DX (US$ Index).  And if we look at the big 3, we find that:

  1. The US$ gained against the GBP
  2. Lost against the EUR and
  3. Gained against the Yen.

So instead of falling as Gold and Soybeans roared up, the US$ at least held its own and in the case of the GBP, more than held its own.

In the meantime, the S&P has been moving up with declining volume and range. Tonight should tell us if there is more upside to come or whether we’ll see a move down.

But whatever happens in the stocks, the interesting relationships are the US$ and the commodities.

If I see the US$ climb and the commodities also spurt up,  I’ll take this to mean that the markets are warning us that inflation is about to rise. That being the case, I expect to see knee-jerk rally in the US$ before the reality of stagflation sets in and the US$ starts to dive in earnest.

Well that’s what the Obama administration has been seeking despite the public announcements for a strong US$ – it’s one way to pay off its accumulating debt.

For traders, if the the breakout in Gold holds, Crude follows suit this week, we have in place the first set of conditions for an inflation warning. If the US$ rallies, the last tumbler will fall into place.If inflation does rear its ugly head, we’ll see trending markets in Gold and Crude.

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