Replies to post #52092 on Abet Chichi2 (Chichi2)

[chichi2]

What is the Correlation_between: $SPX_and_$CRB_??
(The Stock Market and the Commodities Index)

Why is this important?

Each time there is a generally positive correlation on this chart, it means the economy is in a deflationary environment.
This is where stock prices and commodity prices are strongly coupled.
This occurs when the yellow line (bottom chart) stays above the center line, it is said to be in positive territory.
That is, deflation is occurring when there is a positive correlation.
From 2009 onward, this correlation has been unusually strong.

Each time that yellow line stays in negative territory, the economy is in an inflationary mode.
This is where rising commodity prices are bad for stocks.

This chart will give you that critical piece of information well before economists and the financial press do.

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You have already read the Big Message, it is the Above Whole first paragraph.

However, if you wish to be studious, Further reading is below the chart, it will give you more examples over the past few years.
Words were orginally written by Chip Anderson back in March 2012, i have rearranged them.



Going back before 2008, if you look more closely at the yellow line, you can see distinct time periods where the correlation line had a bias towards the positive side and then a bias towards the negative side.

For example, take a close look at the period between 2004 and 2008. Notice that the line was above zero more than it was below it. Also that the line only remained below the line for brief periods of time. Notice also that this effect is stronger in 2004 and 2005 than it is in 2006 and 2007 - a sign that things were breaking down going into the crisis of 2008.

Going back further on the chart, can you spot the exact moment where the current Deflationary environment began? The large jump into positive terrtory at the start of 2001 was the moment where the correlation changed significantly. The events at the end of 2001 and 2002 muddied the picture somewhat, but by late 2003 it was clear we were in a deflationary scenario - which we are still in.

Prior to 2001, the correlation line had a negative bias (inflation). See how it tried and failed repeatedly to move above zero in 2000? Again, it's not precise, but you can see how the yellow line generally stayed below the zero line from mid-1996 through the start of 2001.

Going back further, there was a short period of positive correlation (deflation) from roughly 1993 until mid-1996. Prior to that (not shown on my chart) there was a long period of negative correlation (inflation) starting around 1985.