Friday, January 15, 2010

Inflation Pressures Moderating

The composite indicator that measures the trends in gold, crude oil, and yields on the 10 year Treasury has moderated and will end the week below the extreme zone. End of the week weakness in crude oil, gold and Treasury yields has caused the indicator to back off.

Typically or at least historically, this indicator has longer periods above its extreme zone, and there isn't so much in and out trading on a week to week basis. I suspect a lot of this has to do with the very high correlations between stocks, Treasury yields, and commodities. Everything moves together.

In any case, the indicator value remains high - near the extreme zone - but it is not in the zone. As mentioned last Friday, the rally that began in March, 2009 has stalled every time this indicator has hit the extreme zone. This past week has been no different. During this rally and over the past 25 years, strong trends in gold, crude oil, and yields on the 10 year Treasury have been a headwind for equities. I recently reviewed the use of this indicator as a filter for a simple moving average strategy in our series on developing a trading strategy. I would also recommend reviewing the article "The Faber Model and Inflation Pressures". Once again, this filter improves the efficiency of this simple trend following model.

1 comment:

Steveo said...

This is just plain weird. A coincident timing of longest eclipse in 1000 years, and the S&P is bouncing off, and being repelled by, the 38 Fib Fan line drawn from the 1932 lows to the 2007 highs.
I was pimping out this Fib Fan way back to July 7th, 2009

Now it looks like it is really in play.