Commodity-bond ratio as an equity regime overlay

Grade the stock move against the ratio

The archive case study places a commodity-bond-ratio next to the S&P 500 cash index so that an equity move is read against a commodities-versus-bonds backdrop. Editorial interpretation: before treating an equity trendline break as a standalone event, ask whether that relative-strength line has already broken, stalled, or completed a two-peak turn.

That habit rests on a three-sector-linkage. Commodities, bonds, and equities are read together rather than as isolated charts.

How the overlay is constructed

The overlay is constructed by dividing a Commodity Research Bureau commodity index by Treasury bond futures prices. The resulting line is the commodity-bond-ratio.

An inflation-pressure-reading assigns meaning to the slope. A rising reading is described as commodities outperforming bonds with inflation pressure increasing. A falling reading is described as bonds outperforming commodities with inflation pressure decreasing.

The same direction carries a portfolio-context-mapping. A rising ratio is mapped to an emphasis on commodities over bonds. A falling ratio is mapped to an emphasis on bonds over commodities.

The case study states that a rising ratio is generally associated with a negative equity backdrop and a falling ratio with a more positive one. That pairing is the inverse-overlay.

Trendlines and a double top on the ratio

The ratio is treated as a line that can be analyzed with trendlines and breakouts to identify turns. A ratio-trendline is a sloping line drawn on the commodity-bond-ratio and used to mark a break, stall, or confirmation, the same way a trendline is used on price.

A ratio-double-top is a two-peak formation on the commodity-bond-ratio used to mark a potential turn in the commodities-versus-bonds regime.

Opposite trends from mid-1987

From mid-1987 through mid-April 1992, the S&P 500 cash index and the ratio are described as generally trending in opposite directions. Several ratio peaks are described as coinciding with equity upturns, including turns at the end of 1987 and in autumn 1990. A rising ratio is noted ahead of the 1987 equity break.

Ratio upturns in the spring of 1988 and in late 1989 are described as coinciding with less supportive equity conditions. The late-1989 turn is characterized as the more negative coincidence.

A January breakout and a ratio-double-top

In the mid-1989 to April 1992 window, an upside breakout in the ratio in January 1990 is described as coinciding with an equity downturn. A ratio-double-top is identified on the ratio between April and September 1990. Completion of the second peak toward the end of 1990 is described as coinciding with a large S&P 500 advance.

A rebound in the ratio in the spring of 1992 is described as stalling at a declining trendline in a window still treated as supportive for equities.

The November 1991 close-up

From November 1991 to mid-April 1992, a falling ratio in late 1991 is described as accompanying an equity advance to new highs. An early-January upturn is described as coinciding with an equity correction amid commodity strength and bond weakness. An early-April break of the rising trendline on the ratio is described as being followed by the S&P 500 moving above a 13-week declining trendline.

Editorial interpretation: that close-up shows the habit. The equity move above a declining trendline is graded after the commodity-bond-ratio has already broken its rising ratio-trendline, not read in isolation.