Your Week Ahead: S&P500 To Commodities Ratio May Tell A Story

As commodities rise, are there any clues about the direction of broader US markets? Measuring correlations can help to spot trends across asset classes.

As we head into the new week, we want to be aware of the impending data releases that can affect timing and sentiment. This week is a mild to moderate week on the US economic data side of things, with the largest market impact event happening on Thursday, May 27th, in the form of Preliminary GDP q/q (quarter over quarter) . This number is reported in an annualized fashion (so it is the quarterly change x4). Market participants are forecasting a print of 6.4%. Also, bear in mind that this is the Preliminary GDP number. There are three different GDP data releases, the Advance GDP (earliest indication and usually most impactful on markets), Preliminary GDP (this one), and then Final. A bullish print usually strengthens the US Dollar (not always, but usually).

Other than the GDP print, FOMC members Brainard, and Bostic speak on Monday morning, FOMC member Evans speaks on Tuesday morning, and we have Consumer Confidence data on Tuesday, as well. More Fedspeak is in store for Wednesday, with FOMC member Quarles speaking, leading up to the GDP print on Thursday. Thursday also features US Unemployment Claims and Pending Home Sales. Finally, on Friday, we get the Core PCE Price Index which measures the price of services and goods (ex-food and energy) purchased by consumers (not businesses). This data release could warrant some attention due to the inflationary pressure that has been present in the markets as of late.

Overall, it will be a moderate economic data release in the US. I always like to know what data will be coming out, and when, as a trading week begins.

Correlations. Traders love them. They tell a story that really cannot be quantified unless studying the raw data. As we have had so much attention going to inflation lately, it is a good time to review the broader market S&P 500 vs. commodities to get an idea of the relationship between them.

Figure 1 - SPX/SPGSCI TVC Monthly Candles November 1992 - May 2021. Source tradingview.com

Here we have a long-term chart of the SPX (S&P500) divided by the SPGSCI (S&P Goldman Sachs Commodity Index). So, we have the ratio between the two instruments to inspect. We can see the large blowoff top price action that occurred in this ratio in Q1 2020 as a result of the pandemic (Crude trading negative, anyone?). There is a nice pullback from the blowoff top levels of the pandemic. The question becomes, is that the top or is it time to be long equities and short commodities? Friday’s PCE data could give us another clue. If buying pullbacks tickles one’s fancy in a contrarian fashion, this could be some food for thought.

Figure 2 - SPX/SPGSCI TVC Daily Candles October 28, 2019 - May 21, 2021. Source tradingview.com

Drilling down to the daily candles, we do see an interesting formation that could potentially indicate support of this trade between the 7.70-8.00 levels. The level has been key on the last three tries. Notice the horizontal price support and the MACD (12,26,9) starting to look bullish here. In addition, we have the RSI(14) crossing the 50 line.

So, what does all of this mean? Trading ratios does require some knowledge and arithmetic. A trader would need to be long an identical X dollars worth of one instrument and short X dollars of the other to make it work. Do you have experience with this type of pairs trading?

For now, let’s just explore the potential that the S&P 500 could be inexpensive compared to the commodity basket that the SPGSCI measures. Is one of them “cheap” or is the other “expensive”? Or both? Given the S&P 500 earnings multiple, money printing, and other policy directives from the new US administration, it may be simple to conclude that stocks are overpriced, and commodities will go up in a straight line. H owever, is trading really that easy? Bull markets, such as the one in the S&P 500, do not tend to go out in a whimper. Instead, they tend to go out with a bang.

In the May 10th publication , we were examining the Invesco MSCI Sustainable Future ETF (ERTH) given the US infrastructure bill, new administration, and other factors.

Now, for our premium subscribers, let’s revisit ERTH, and see what the price action may be telling us, given recent market developments. Not a Premium subscriber yet? Go Premium and receive my Stock Trading Alerts that include the full analysis and key price levels.

Thank you for reading today’s free analysis. I encourage you to sign up for our daily newsletter - it's absolutely free and if you don't like it, you can unsubscribe with just 2 clicks. If you sign up today, you'll also get 7 days of free access to the premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

Rafael Zorabedian
Stock Trading Strategist

Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

This content is for informational and analytical purposes only. All essays, research, and information found above represent analyses and opinions of Rafael Zorabedian, and Sunshine Profits' associates only. As such, it may prove wrong and be subject to change without notice. You should not construe any such information or other material as investment, financial, or other advice. Nothing contained in this article constitutes a recommendation, endorsement to buy or sell any security or futures contract. Any references to any particular securities or futures contracts are for example and informational purposes only. Seek a licensed professional for investment advice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Information is from sources believed to be reliable; but its accuracy, completeness, and interpretation are not guaranteed. Although the information provided above is based on careful research and sources that are believed to be accurate, Rafael Zorabedian, and his associates do not guarantee the accuracy or thoroughness of the data or information reported. Mr. Zorabedian is not a Registered Investment Advisor. By reading Rafael Zorabedian’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Trading, including technical trading, is speculative and high-risk. There is a substantial risk of loss involved in trading, and it is not suitable for everyone. Futures, foreign currency and options trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment when trading futures, foreign currencies, margined securities, shorting securities, and trading options. Risk capital is money that can be lost without jeopardizing one’s financial security or lifestyle. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Rafael Zorabedian, Sunshine Profits' employees, affiliates, as well as members of their families may have a short or long position in any securities, futures contracts, options or other financial instruments including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice. Past performance is not indicative of future results. There is a risk of loss in trading.

*********