Monday, May 2, 2011

The Bullish Case for Equities

Our indicator constructed from the trends in the CRB Index, gold, and yields on the 10 year Treasury  has not been in the extreme zone for 8 weeks now , and within the context of a trend following strategy that I have detailed here, here, and here, the SP500 should have a positive bias.   In essence, with prices on the SP500 above its 40 week moving average and our indicator not in the extreme zone, prices should move higher.  The trend remains up and inflation pressures are neutral.   This is the bullish case for equities.

But let's me be clear about one thing: the gains that equities might enjoy are unlikely to be as great or as accelerated as if the market is coming off a bottom.  With rising bullish sentiment and less money on the sidelines, stocks just won't have that "uumph".  Gains are possible but not at the rates that are seen at market bottoms. 

The indicator constructed from the trends in the CRB Index, gold, and yields on the 10 year Treasury is shown in the middle of a weekly chart of the SP500 in figure 1.  I last discussed this strategy (click here) 8 weeks ago in the context of "buying the dip". 

Figure 1. SP500/ weekly


Jim said...

May I ask what the previous version of the model -- the one which used crude oil rather than the CRB index as a component -- is showing?

I know you changed it for a reason. But I felt that the earlier version was more elegant. Since gold is a component of the CRB, there's a small element of double-counting in the current version.

And rising gasoline prices are a major psychological factor at present ... much more so than the CRB, which doesn't ring a bell for most of the public.

Guy M. Lerner said...

Jim: Great question and very valid

1) the old model used crude, gold, and yields and the new model uses CRB, gold, and yields

2) the reason to switch was to capture more general commodity inflation plus I could look at data going back to 1973 with CRB and with crude it was only 1984

3) the results did not matter which data I used

4) plus it is my understanding that CRB was 40% crude so it seem to make sense to use the broader index

5) more specifically to your question -- crude oil has been up strongly while agriculture commodities appear to be softening therefore CRB is in neutral trend while crude is in a strong trend

6) utilizing the CRB, yield, gold model the signals over the past couple of months have been:

Sell signal from 2/18 to 3/11

Buy Signal SP500 on 3/18 at the close to the present

7) utilizing the crude, yield, gold model (which is old configuration) you get:

Sell signal from 3/4 to 4/29; during this time the SP500 gained 3%

Buy Signal from 4/29 to present because yields are going down

Using the new configuration has been helpful in this instance; however, profits have yet to be booked on this trade

Both models are in alignment at present as yield pressures are diminishing

Jim said...

Ah -- here's where I got that historical data. They have the GSCI back to 1970, and the CCI and CRB indexes back to Sep. 1956.

Prices seem fairly reasonable, compared to most institutional data providers.

Guy M. Lerner said...

Jim: thanks for the data link