How the commodity tail wags the stock market dog

Preface: Explaining our market timing models 

We maintain several market timing models, each with differing time horizons. The “Ultimate Market Timing Model” is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.


The Trend Asset Allocation Model is an asset allocation model that applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can bsoe found here.



My inner trader uses a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don’t buy if the trend is overbought, and vice versa). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the email alerts is updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.



The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities
  • Trend Model signal: Bearish
  • Trading model: Neutral

Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of those email alerts is shown here.

Subscribers can access the latest signal in real-time here.


How strong is the commodity bull?

How far can the inflation trade run? A long-term chart of the conventional inflation hedge gold shows a bullish cup and saucer pattern with strong upside potential.



By contrast, the CRB Index approaching resistance appears overbought and extended.



Here’s why this matters. An analysis by KKR concluded that the US economy is in a late cycle expansion, which is a period of decelerating equity returns. As the Fed raises rates to choke off inflation pressures, the inflation-sensitive commodity bull will fade and take the stock market down with it as economic growth decelerates.




In effect, we have a case of the commodity tail wagging the stock market dog.



Inflation hedge leadership

A review of inflation vehicle leadership shows that inflation hedge leadership is mostly intact. The relative performances of energy, mining, and agribusiness are in relative uptrends, though the relative return pattern of real estate is more choppy.



The relative performances of the stock markets of resource-producing countries are mostly in uptrends while undergoing high-level consolidations.



In particular, the Russia-Ukraine war has exposed the vulnerability of Asian markets, which tend to be major commodity importers.



One way of measuring the strength of the global inflation and commodity trade is the long producer/short importer pair. The following chart shows the relative performance of selected country and region pairs.
  • Long Australia and short Japan.
  • Long Canada, which is an energy exporter, and short eurozone.
  • Long Brazil, a grain exporter, and short frontier markets, which are mostly food importers.
  • Long Indonesia and short Vietnam as the example of a regional Asian pair.


In all cases, these pairs are in strong relative uptrends. The commodity trade is still alive and kicking.



Bond market rally ahead?

Over at the fixed income markets, bond yields have been surging but they appear to be stalling. The 2s10s yield curve has inverted, which is a decelerating economy. At some point, bond yields should fall in anticipation of slower growth. Indeed, the 10-year Treasury yield seems to have stalled after skyrocketing in 2022.



Long Treasury prices look like they are bottoming after exhibiting a positive RSI divergence.



Similarly, the stock/bond pair looks extended after showing a negative RSI divergence.



These are all signs that the bond market is setting up for a rally, and stock prices may be due for a period of relative weakness.



What to watch

The S&P 500 staged an upside breakout last week but pulled below resistance turned support, indicating a failed breakout. However, the market did print a hammer candle, which is a potential bullish reversal that will need to be confirmed by Monday’s market action.



I continue to monitor the S&P 500 intermediate breadth oscillator for a recycle from an overbought condition to neutral, which would be a sell signal.



Longer-term, I am watching the long producer/short importer pairs. Widespread breakdowns in these pairs would be a sign of a transition from a late-cycle market regime to a contractionary phase. Until then, investors can consider the pairs as sources of performance – with a well-defined risk control process.


34 thoughts on “How the commodity tail wags the stock market dog

  1. An interesting observation.

    Last week NEM, RGLD and AUY all good mining stocks made 52 week highs with NEM the biggest mining stock being exceptionally strong on Friday. In fact, GDX the gold mining index is out performing GLD – the gold Index this time around.

    Now both cannot be right either the gold stocks are topping out or gold is setting up for an explosive rally. I am yet trading GDX from the long side. However, trading has been very difficult. It is like riding a wild bull. Physical Gold has had air pockets where drops of 20 to 35 dollars are happening frequently caused by the news flow regarding the Ukraine war. This is having an impact on GDX.

    1. Some more observations
      1. Most gold stocks have the 20 week moving average above the 50 week moving average. This is a long term bullish sign.

      2. Last week the leading gold stocks had an “outside engulfing pattern”. This is when the low is greater than the previous low and the high is greater than the previous high and the close is greater than the previous close. Normally, this is considered a very bullish configuration.

      1. Thanks, Cam I value your input. Charts and moving averages tell you what has happened and not what may or not happen in the future. Finally, trend trading is a matter of probability. One is hoping that Newton’s second law applies i.e momentum will continue.

    1. Totally agree. KKR as a product supplier will always have an upward tilt to future markets even though they say we are in late cycle and they have two years in the future of the S&P 500 going up without going into a bear market.

      They show all kinds of negative forces in future and a Fed without tools to rescue this time while this S&P up and up is their call.

      Never expect a product supplier to say we are in a bear market so take your money away from our products.

      In other words, this is as firm a bear market call we will ever see out of KKR.

  2. Hi Cam,
    Currently your trend model is bearish which indicates to me that the market is going “down”? If there is positive follow-up this week would your trend model possibly turn neutral or would it require much more to change the model?
    Currently my model of the S&P 500 which is based on S&P500 price and various breadth and VIX parameters has just turned positive. Possibly we are in for a short run until we reach the all-time highs where it would probably at least stall again? What do you think?

  3. If I’m reading Cam’s comments correctly, he expects bonds to rally soon. That may be a good alternative investment over the next few weeks.

    1. Famous last words.

      Although that’s still my take. Had I been watching the market in the final hour I would have added to VT.

  4. Looks like I was completely wrong on all counts, and will have to manage my way out of this.

    1. TLT is a real surprise. No point in adding at this point. However, I have decent gains on TLT over the past two days against which to net what will certainly be losses today. It’s a question of how far yields can go.

    2. When buying on weakness only to see further declines my mental strategy is to simply remind myself that the vast majority of investors (who are mostly in buy-and-hold mode) are experiencing pretty much the same draw downs.

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