A capacity-stress checklist across commodities, bonds, and breadth

From a late-cycle hunch to a checklist

Capacity-stress is a regime in which unused economic slack is shrinking and inflation fear begins to compete with growth. The archive framed intermediate-term equity conditions as most hospitable when growth continues with unused capacity and without inflation or deflation pressure, and as hostile once the economy approaches full capacity.

Editorial: a late-cycle hunch that slack is running out is not a completed read. The archive workflow turns that hunch into a capacity-stress checklist.

Read industrial prices, bonds, and equities together

Intermarket-analysis here means reading industrial prices, bonds, policy, and equities as one inflation-expectation system rather than as isolated charts. Interest rates and equities were said to move together because both respond to inflation expectations, so industrial commodity prices were preferred to a standalone rate series as the shared driver.

Broad advances in industrial materials such as aluminum, copper, palladium, and zinc were treated as evidence that capacity was tightening, a setting in which both equities and bonds were expected to weaken.

Industrial commodities turned up and bonds turned down months before official rate increases, so policy was read as lagging the intermarket inflation sequence rather than causing it.

A six-month rate-of-change marks the hostile regime

Rate-of-change is a percent change over a fixed lookback, applied here to industrial spot prices and high-grade bond yields. A six-month rate-of-change above 10% in a raw-industrial spot index was used as a hostile regime for stocks and bonds. A reading below zero was the stated condition that reopened those markets.

Why a short bounce does not clear capacity-stress

Horizon-split is the observation that the same commodity impulse can support equities over a few weeks while pressuring them over several months. Over a four-to-eight-week horizon the commodity-equity link reversed: rising industrial prices were read as near-term growth and earnings support, and falling prices as near-term pressure.

Editorial: a four-to-eight-week rise in industrial prices can look like support even while the six-month rate-of-change still marks a hostile regime. The horizon-split is why that near-term bounce does not cancel the longer checklist.

Breadth and utilities as confirmation

A short-term relative-strength-index of unweighted listed-stock averages versus capitalization-weighted averages, strongest when the advance-decline line also leads the unweighted series, was used as a breadth forecast. Relative-strength-index is a quantitative comparison of ordered price or breadth series against a stated baseline and lookback.

Editorial: breadth is not a substitute for the six-month industrial rule. It is the later confirmation, joined to the utility relative-strength leg of the bottom-checklist, before a decline is treated as exhausted.

The joint bottom-checklist

A bottom-checklist is a joint set of commodity, yield-pace, bill-stability, and utility relative-strength readings used to test whether capacity-stress has eased. A review of 15 major bottoms since 1956 summarized four joint averages: six-month commodity change slightly below -3%, six-month Aaa yield change of 3%, Treasury-bill yields 5.7% above their six-month low, and S&P utility relative strength 13.5% above its 12-month low.

At the mid-1994 observation those same series sat far from the bottom averages: commodity six-month change above 10%, Aaa yield six-month change near 20%, bills more than 33% above their six-month low, and utilities not yet showing the required relative-strength recovery.

A rare deflation-risk watch

A three-month consecutive decline in nominal M1 was reserved as a rare deflation-risk watch that had not appeared in postwar data. Money-supply tracking was otherwise judged less informative because balances sat outside banks.