$CRX Beginning to Rumble: Suggests Deflationary Forces Building

January 3rd, 2012
in contributors

by Albertarocks

In this article we're going to revisit the topic of the S&P 500 as it would appear relative to a basket of commodities stocks (the $CRX).  Last May I presented the first article on this study, which I'm happy to report garnered a rather surprising degree of interest.bull-bear After the passage of 7 months, it's definitely time to take another look at the charts since a whole lot has developed, and pretty much as suspected.

First, let me brush the dust of the old thesis and summarize what the theory is here.  But before we go any further, even though I am very aware that lengthy articles are generally speaking darned near a nuisance, I find that I just cannot get this study much shorter and still provide the explanations that I think are necessary.  For those of you who might be annoyed by a relatively long article, I can simply extend my apologies and offer
this happy alternative.  For those who elect to continue with a relatively lengthy but revealing study, we carry on

Follow up:

Most readers have probably seen studies where the analyst takes a look at the equities markets as they would appear priced in gold, oil, or any one of several other meaningful relaters, such as a different commodity, foreign currency or domestic bond, or perhaps an index such as the VIX.  The resulting charts can often be a real eye opener, revealing some rather interesting if not downright frightening realities.  Unfortunately, in many cases no sooner is that article released than the debunkers parade forth declaring something akin to "Yeah but it means nothing.  Gold is irrelevant.  It has no intrinsic value.  Goldbugs are a bunch of fools."  It's a big mistake to totally discount those types of studies and to make such outrageous claims, but to a degree the protesters have a point.  In the case of using gold as the benchmark for example, the debunkers are flat out correct.  The reason being that the price of gold has been manipulated and suppressed for so long by the central planners who dare not allow it to rise as it should, out of fear that the unwashed masses might notice the astonishing effect inflation has had on their lives.  That type of price manipulation by the dark overseers is insidious, far reaching, and ongoing.  Not to mention that it can really mess up an otherwise valuable and revealing study.  And let there be no debate, spin and price manipulation will surely continue unabated until the regulators themselves are given a friendly demonstration on how a guillotine works.  Until that day arrives though, we're going to have to find other methods of getting at the truth.

So pricing equities in gold is not going to reveal the facts with the honesty and accuracy we're demanding.  How about this one?  Gold priced in oil.  Well, oil too is a manipulated market but at least it would provide a more realistic representation of the health of the entire global economy than gold does.  So shortly after the $CRX article was published, I investigated the relationship between oil and equities and published the results in an article entitled "Oil Confirms the S&P 500 Lost Decade".  And as suspected, that study too betrayed the fact that although decades of money creation had indeed driven the price of just about everythinghigher, including equities AND commodities, a major dichotomy began in 1999.  From that year forward the equities markets began to languish, to fall behind as the commodities markets became the focus of investment.  In oil's case, over the next dozen years West Texas had risen an astonishing 8 times as much as the price of equities.  To be more precise, between the year 1999 and May 2011, the price of oil had risen 787% as much as the value of the S&P 500 had (in percentage terms).  To borrow one of my own sentences from a precious article, "No folks, when the equities markets are soaring, you are not getting your money's worth."  But remember, inflation doesn't exist.  By the way, does anybody have any idea why food and energy are not included in the CPI data?  I do.

So now we come to the crux of this study.  Since it isn't even debatable that something major occurred in 1999 that caused prior decades worth of money and credit creation to begin to flow into commodities, would there be a way to detect whether or not that phenomenon has affected equities, by looking within the S&P 500 itself?  The answer fortunately is yes!  By isolating a basket of commodities only related stocks and pricing that basket in terms of the entire S&P 500, a remarkable relationship is revealed.  By creating a ratio between the two ($CRX:$SPX), an incredible long-term uptrend immediately becomes apparent, a trend line that has been not only rising but accelerating for over a dozen years.  Of course this same type of rising trend line is also apparent when we price oil, gold or copper in terms of the equities markets, just as we've done here.  But the $CRX is the only one of these vehicles that participates directly inside the NYSE itself.  Since it is a basket of stocks, it's pretty difficult to get a comparison that's any more direct.

This particular ratio provides not only an astonishing picture of the face of inflation in commodities since 1999, but a method by which we are able to measure whether or not those inflationary forces might enter into a secular change of direction... as measured from within the stock market itself. In other words, the ratio should be able to detect a deflationary event in the equities markets with a degree of magnification.  And as can clearly be seen, the effect of the crash in prices in the summer of 2008 was immediately reflected in the ratio... in such glaring fashion that its usefulness as a measure of the battle between the titans of inflation and deflation is made starkly apparent.  What follows are the results of this study.

But first, in order to transition from what has (up until this point in this article) really just been an 'overview', it would probably be helpful to revisit one key chart from the initial study.  The monthly chart below shows the relationship between the $CRX and the S&P 500 as it appeared in May of 2011.  Click once for larger image, click a second time for much larger image.

MONTHLY percentage style as it appeared in May, 2011.  

In the chart above, we see the remarkable rise in the value of commodities only related stocks that began abruptly in late 2000 and which accelerated at an ever-steeping rate until the equities crash of 2008.  The effect that equities crash had on the ratio is abundantly apparent.

Who doesn't remember the horrifying situation the entire world found itself in with the collapse of Lehman Bros, and the ensuing panic which led to an emergency funding program as announced by the FED on Nov. 28th, 2008? That's what we're talking about here.  The first collapse in the ratio seen in the chart above reflects the fear that all of us were feeling during those scary, scary days.  If not for that emergency funding and all the subsequent QE interferences and money creation that have occurred since, the ratio on that chart would have collapsed so far it would now be lying on the floor somewhere underneath the desk your monitor is sitting on.  And that folks, is what a brief glimpse at deflation looks like.  That episode was plenty scary enough for me and I certainly don't want to experience that again.  But do you know what?  The odds are very high that I'm going to have little choice in the matter.  We're all going to have to go through it.  No wonder the FED is so horrified to see the cork slowly rising out of the top of that deflation bottle.  Because contained within is one powerful genie, one which the FED has no control over once it has truly escaped.  The focus of this analysis is on that cork.

But thanks to literally trillions in emergency funding, not only did the cork get hammered back into the old bunghole just in the nick of time, causing the ratio reverse its downward course and turn back higher, but the ratio immediately accelerated higher at a even faster rate than at any time in the past.  Truly incredible.  A rate so steep that I thought it impossible to maintain.  A rate so steep that it begged the questions, "Why are QE funds flowing at such an incredible rate into commodities only related stocks?    Why are commodities themselves rising at 8 and 10 times as fast as equities are?  Is that what QE was designed to do?"

No, that was not the intention of quantitative easing but it was certainly a consequence nonetheless!  It was a signature of the effect of bankers and hedge funds playing with free money.  It was a sign of their opinion that 'real goods' were to become far more valuable than equities.  It was a sign of their "expectations of inflation", a role that at one time was reserved for gold.  The near vertical rise in the ratio was the unmistakable hallmark of the investing attitude popularly known as "risk on".  Sure, the stock markets exploded higher with the issuance of QE, but once again, in less than 3 full years, the $CRX exploded at literally double the pace.  When all was said and done, between 1999 and May of 2011, commodities only related stocks had risen 64 times as far as the S&P 500 had.  You read that right!  6400%.

And here is where this update really begins -

What has happened since the monthly chart above was first published in May?  Plenty!  As suspected, the ever steepening trend line in the ratio was indeed unsustainable.  In spite of all the quantitative easing and funding that has been made available since Nov., 2008 via the FED, the ECB and the entire global shadow banking system (regardless of how it works), in the past 4 months the ratio between the $CRX and the S&P has suddenly collapsed for only the second time in over a dozen years.  This is a very serious development because even though we all realize that equities have been struggling since the peak on May 2 of this year, how many investors are aware that money has begun to flow out of the commodities stocks at an even faster rate?  How many realize that this sudden phenomenon is a very serious warning that total global re-funding efforts appear to be insufficient?  How many realize that this potentially represents the great unwinding of decades worth of credit expansion?  How many realize that the spectre of deflation is emerging once again, in spite of massive, historically unprecedented amounts of fresh liquidity?

In the monthly chart below we see that a second abrupt downturn in the ratio has occurred, in spite of 3 full years of an unprecedented amount of added liquidity.  The latest and steepest of the yellow uptrend lines has suddenly been broken and then retested, the intermediate trend line has been broken handily and the entire 12-13 year trend line has been revisited.  The long term trend line did hold.  However, realists should not expect it to provide support on the next revisit... which logic would lead rational observers to conclude is inevitable.
Click once for larger image, click a second time for much larger image.

MONTHLY percentage style as it appeared on Dec. 23, 2011.  Naturally this chart is
a slow mover but if you'd like to keep tabs on it, here is the live and updated version

Author's note: My apologies to some readers.   I did not realize until after this article was published that a link to a "monthly" chart will not display properly for those who are not subscribed to StockCharts.  I apologize for any frustration the above link might have caused.

At this point, generally speaking the gist of this article has been established.  Some readers might just prefer to skip to the conclusion at the end of this article and that would be perfectly acceptable.  By now the main observations pointing to the potential for a sea change in the balance between deflationary and inflationary forces have been delivered.   For those readers who might be interested in diving in for a closer look at the most recent action focusing on the recent sudden drop in the ratio, we dial into the weekly charts next...

At this point of course, we don't honestly know with any certainty whether or not the ratio is indeed going to turn lower for a revisit to the long term trend line, let alone whether or not that trend line will be penetrated.  But logic would strongly suggest that since the ratio is currently headed lower for the second time in only 3 years, that trend line is almost certainly the target, at the very least.  As we did in the May article, we'll now dive a little closer to the action to see what's transpiring in the weekly perspective.  As a refresher, we first look at the weekly chart as it existed back in May, complete with the annotations and observations at that time.
Click once for larger image, click a second time for much larger image.

WEEKLY - As it appeared in May, 2011

At the time the chart above was published, it was apparent that upward momentum was waning, suggesting that the upward trend in the ratio might be on the verge of breaking down.  As you now know, break down it did.  In the chart below we see the situation as it exists today, complete with a few recent observations. Click once for larger image, click a second time for much larger image.

WEEKLY - As it appeared Dec. 23, 2011.  Click here for a live and updated version (larger image)

Although I have a good understanding of Elliott Wave Theory as put forth by Ralph Elliott and have read a couple of Robert Prechter's books, I am the first person to admit that EWT is not for me.  I am not good at wave counting and have been deked out by EWT more times than by the last alley cat I tried to catch for dinner.  Having said that though, I do recognize chart patterns and have a very thorough understanding of all of the standard momentum indicators used in chart analysis, and then some.  And the message I'm getting from the chart above is that the downward action in the ratio that we see from red candles at the July peak is far from finished.  In fact, not only are the stochastics, RSI and MACD not even close to being oversold, they're actually hanging around in neutral territory with a long, long way to go before we would even begin to see any oversold conditions that would suggest a bounce might be on the horizon.  Further, I wouldn't expect to see a bounce in the ratio until after we've seen some sort of positive divergence in at least one of these indicators.  Such an event seems quite far off indeed. 

At that point, I also fully expect that any bounce would take on a 3-wave form as opposed to the 5-wave structure that we currently see developing to the downside.  Admittedly, at this stage of the game that's about as much speculation as this study should entertain.  There's no point in trying to see too far into the future when we have perfectly good charts that are telling the story pretty much as expected they would.  Further, I suspect these charts will continue to behave with rare honesty since it would be rather difficult for the orcs to be able to manipulate and alter what's really happening on a scale as large as this, and while using a comparison as direct as this... unless they decided to target the basket of stocks within the $CRX itself for the sole purpose of messing up this thesis.   They'd have to tackle the entire commodities complex in order to accomplish that.  Such a notion is the least of my concerns.

And finally, without discussion, I'll offer this link to the daily chart of the $CRX:$SPX ratio for the diehard practitioners of technical analysis.  The annotations on the chart should be sufficient to express my own opinions about where the ratio is headed.  Even though it is possible to drill down even further with this particular analysis and look at it on a 30 minute time frame for example, I am quite satisfied to examine this phenomenon from 20,000 feet using the weekly chart.  At certain times I do refer to the daily chart but for all intents and purposes, it is the stunning 12-13 year trend that we really want to examine.


After nearly a 13 year uptrend, with acceleration all the way, the ratio of the commodities only related stocks and the S&P 500 is finally showing signs of stress.  The pattern is looking very tired. In July of this year, the ratio
broke down and began to head sharply lower for the second time in only 3 years. This had never happened once in the 10 years previous. If the ratio should close below the long-term trend line representing the entire 13 years, we are most likely looking at facing a deflationary cycle the likes of which the world has never even dreamed of, let alone
experienced. And it would be perfectly within reason to expect the deflationary phase to last a Fibonacci 38.2% of the time involved in the entire uptrend. So far that uptrend has not conclusively been broken, but when (<b>and if</b>) it is, it would have lasted a minimum duration of 13 years. Therefore, based on that time span we should be
anticipating a major deflationary phase to last a minimum of 5 years, suggesting a bottom occurring perhaps some time in 2017.

Consider this:  Between 1999 and today, the S&P 500 has risen a grand total of 2.92% in nominal terms.  Commodities stocks have risen 377% in the same time span.  In other words, today the $CRX is still perched in the situation where it has risen 129 times as far as equities have over the past 13 years (12,900%).  Is this sustainable?  Absolutely not!  Economies will be crushed with the price of commodities rising unabated like that.  People will literally starve to death in their millions if food prices continue much higher, let alone at this astonishing rate of acceleration.

I hope readers can grasp the severe implications that these facts carry should a great unwinding of this phenomenon develop.  An unraveling of this magnitude would represent a credit contraction (money destruction) of near-biblical proportions.  I believe it is inevitable... but I also admit I could be wrong.  It is entirely possible that the ratio could just continue to burst higher from here and credit expansion continues for a few more years to come, at unbearable cost to us all.  I highly doubt it can continue.  But that's why I study it.  I want to know... and so should you.

I will continue to monitor this situation but don't plan on writing about it any further until I see clear evidence that the major trend line has either been broken or is at least coming into play in a big way.  If that article ever does become necessary, it will appear right here.

List of the stocks included in the $CRX

Related Articles

Investing articles by Albertarocks

AR Albertarocks is the pseudonym for a talented chart analyst whose work has been published at several web sites and now appears at Albertarocks’ TA Discussions. Global Economic Intersection is fortunate that Albertarocks posts some of his very unique analysis here.

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  1. Dig Deep Email says :

    Excellent analysis AR - thanks for the insight on a huge macro trend. The economic landscape seems treacherous and anyone looking to preserve capital will be well served to follow your analysis. Thanks

  2. Mayascribe says :

    Thanks, Rocks!

    Great article.

    The CRX/SPX ratio is one to keep track of.

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