CRB Commodities Versus SPX Monthly Chart Price Divergence

One of the most surprising market behaviors this year is the weak commodities area but the broad indexes catapult higher. This is very uncharacteristic for markets and they will sync up again at some point forward. Note the 2008 crash where commodities and stocks both plummeted to the March 2009 lows. CRB and SPX move in lock-step as the Fed's easy money flooded into the markets. Traders ran into commodities since the easy money would pump construction and building activities and feed the China boom that was ongoing. Then, in late 2011 and early 2012, commodities began lagging. This is after the QE2 program was running out of gas. The ECB stepped in with the LTRO 1 and 2 stimulus moving into 2012 which pumped equity markets but the money was no longer moving into commodities.

The relationship was hanging in there through 2012 and the expectation would be that the CRB and SPX would converge again and get back in sync, but instead, the divergence becomes obscene and this year the SPX moves straight up while commodities move down. The fact that commodities have been weak all year is a major frustration for market bears since market behavior tells you the SPX should be flat or lower, instead, the broad indexes are printing all-time highs. The divergence is proof positive of the power of the Fed and other central bankers and how the stock market is purely pumped higher with the universal money-printing. The weak commodities signals a weak global economic environment but fundamentals are not applicable. The large divergence as 2013 began is mainly due to the BOJ money-printing. Japan yells "Banzai!!" and beats the yen senseless causing the dollar/yen to move above 100, and higher, and create a big upside market orgy in the Nikkei and U.S. equities. Fundamentals, such as commodities, are old school now, no one cares about the building blocks of a healthy economy and society anymore when you have the printing presses running 24/7. Party on.

Keystone uses the $CRB Reuters/Jefferies Index to gauge inflation and deflation. At 274, the U.S. economy sits in a deflationary funk right now that no one wants to talk about since this is the exact thing that Chairman Bernanke has been trying to avoid for the last nearly 5 years with his dropping of money from helicopters. Considering the current disinflationary and deflationary status, no wonder future Fed Chair Yellen downplayed the U.S. economy yesterday and said the stimulus would continue to flow. The Fed is losing the battle against deflation which, if it continues, will likely lead to dire consequences. If the 10-year yield moves higher to 2.90%, this would only push the economy into a disinflationary mode (out of deflation) with inflation remaining on a milk carton. For the chart above, typically, when one entity deviates more greatly than the other, in this case the vertical move in the SPX, this entity will correct more as the lines converge. This information is for educational and entertainment purposes only.  Do not invest based on anything you read or view here.  Consult your financial advisor before making any investment decision.