Charting Stocks

I noticed a couple of comments (OK just one) regarding inflation/deflation and how to know which is dominant. To get the answer I like to use a simple inflation/deflation indicator that I first learned about by reading John Murphy’s Intermarket Analysis book. I highly recommend reading this book to anyone who’s interested in charting stocks or economics.

Since we know that commodities rise during periods of inflation and bond prices rise in periods of deflation (interest rates are falling) we can plot them together on a chart. In my example (below) I used the CRB index divided by 10-year treasury notes (price). When the line is rising, inflationary pressures prevail and so when the line is falling deflationary pressures prevail.

In this example, we can clearly see that the dominant force was inflation since 2002. We can also see that a 6-year uptrend peaked in 2007 and was broken in 2008 (In a big way). Deflation is now a bigger concern.

Leading Indicator

You can also use the ratio a a leading indicator of the stock market. The chart below illustrates it’s effectiveness. The ratio bottomed one year before the stock market (Green line) did. It also topped one year before the stock market.

While I do use this indicator as one of many stock market indicators I would urge you to never base any of your decisions on any one indicator. Stock chartists use a handful of different indicators to try and give the most probable outcome based on the results of their analysis. Probabilities of the most likely scenarios is what we base our decisions on. Never certainty.

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3. US Dollar Losing Steam
4. NBER’s Recession Call & The Importance of Stock Charts
5. Kondratieff Vindicated? A Look at the K-Wave