commodity and bond markets gave ample warning that thestrength in the stock market going into the fall of that year was on very shaky ground.hi Chapter 3 the crucial link between the CRB Index and the bond market, which isthe most important relationship in the intermarket picture, will be examined in moredepth. The real breakthrough in intermarket work comes with the recognition of howcommodity markets and bond prices are linked (see Figure 1.3).Chapter 4 presents the positive relationship between bonds and stocks. More andmore, stock market analysts are beginning to use bond price activity as an importantindication of stock market strength. The link between commodities and the U.S. dollarwill be treated in Chapter 5. Understanding how movements in the U.S. dollar affectthe general commodity price level is helpful in understanding why a rising dollaris considered bearish for commodity markets and generally positive for bonds andstocks. In Chapter 6 the activity in the U.S. dollar will then be compared to interestrate futures.Chapter 7 will delve into the world of commodities. Various commodity indexeswill be compared for their predictive value and for their respective roles in influencingthe direction of inflation and interest rates. The CRB Index will be examined closely,as will various commodity subindexes. Other popular commodity gauges, such asthe Journal of Commerce and the Raw Industrial Indexes, will be studied. Therelationship of commodity markets to the Producer Price Index and the ConsumerPrice Index will be treated along with an explanation of how the Federal ReserveBoard uses commodity markets in its policy making.
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A NEW DIMENSION IN TECHNICAL ANALYSIS
FIGURE 1.3BONDS AND COMMODITIES USUALLY TREND IN OPPOSITE DIRECTIONS. THAT INVERSERELATIONSHIP CAN BE SEEN DURING 1989 BETWEEN TREASURY BOND FUTURES AND THECRB FUTURES PRICE INDEX.Bonds versus CRB Index
International markets will be discussed in Chapter 8, where comparisons willbe made between the U.S. markets and those of the other two world leaders, Britainand Japan. You'll see why knowing what's happening overseas may prove beneficialto your investing results. Chapter 9 will look at intermarket relationships from adifferent perspective. We'll look at how various inflation and interest-sensitive stockmarket groups and individual stocks are affected by activity in the various futuressectors.The Dow Jones Utility Average is recognized as a leading indicator of the stockmarket. The Utilities are very sensitive to interest rate direction and hence the actionin the bond market. Chapter 10 is devoted to consideration of how the relationshipbetween bonds and commodities influence the Utility Average and the impact of thataverage on the stock market as a whole. I'll show in Chapter 11 how relative strength,or ratio analysis, can be used as an additional method of comparison between marketsand sectors.
THE STRUCTURE OF THIS BOOK
11
Chapter 12 discusses how ratio analysis can be employed in the asset allocationprocess and also makes the case for treating commodity markets as an asset classin the asset allocation formula. The business cycle provides the economic backdropthat determines whether the economy is in a period of expansion or contraction.The financial markets appear to go through a predictable, chronological sequence ofpeaks and troughs depending on the stage of the business cycle. The business cycleprovides some economic rationale as to why the financial and commodity marketsinteract the way they do at certain times. We'll look at the business cycle in Chapter13.Chapter 14 will consider whether program trading is really a cause of stockmarket moves—or, as the evidence seems to indicate, whether program trading is itselfan effect of events in other markets. Finally, I'll try to pull all of these relationshipstogether in Chapter 15 to provide you with a comprehensive picture of how all of theseintermarket relationships work. It's one thing to look at one or two key relationships;it's quite another to put the whole thing together in a way that it all makes sense.I should warn you before we begin that intermarket work doesn't make the workof an analyst any easier. In many ways, it makes our market analysis more difficultby forcing us to take much more information into consideration. As in any othermarket approach or technique, the messages being sent by the markets aren't alwaysclear, and sometimes they appear to be in conflict. The most intimidating feature ofintermarket analysis is that it forces us to take in so much more information and tomove into areas that many of us, who have tended to specialize, have never venturedinto before.The way the world looks at the financial markets is rapidly changing. Instantcommunications and the trend toward globalization have tied all of the world marketstogether into one big jigsaw puzzle. Every market plays some role in that big puzzle.The information is there for the taking. The question is no longer whether or notwe should take intermarket comparisons into consideration, but rather how soon weshould begin.
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2The 1987 Crash Revisited an Intermarket Perspective
The year 1987 is one that most stock market participants would probably rather forget.The stock market drop in the fall of that year shook the financial markets around theworld and led to a lot of finger pointing as to what actually caused the global equitycollapse. Many took the narrow view that various futures-related strategies, suchas program trading and portfolio insurance, actually caused the selling panic. Theyreasoned that there didn't seem to be any economic or technical justification for thestock collapse. The fact that the equity collapse was global in scope, and not limitedto the U.S. markets, would seem to argue against such a narrow view, however, sincemost overseas markets at the time weren't affected by program trading or portfolioinsurance.In Chapter 14 it will be argued that what is often blamed on program trading is inreality usually some manifestation of intermarket linkages at work. The more specificpurpose in this chapter is to reexamine the market events leading up to the October1987 collapse and to demonstrate that, while the stock market itself may have beentaken by surprise, those observers who were monitoring activity in the commodityand bond markets were aware that the stock market advance during 1987 was on veryshaky ground. In fact, the events of 1987 provide a textbook example of how theintermarket scenario works and make a compelling argument as to why stock marketparticipants need to monitor the other three market sectors—the dollar, bonds, andcommodities.THE LOW-INFLATION ENVIRONMENT AND THE BULL MARKET IN STOCKSI'll start the examination of the 1987 events by looking at the situation in the commodity markets and the bond market. Two of the main supporting factors behind the bullmarket in stocks that began in 1982 were falling commodity prices (lower inflation)and falling interest rates (rising bond prices). Commodity prices (represented by theCommodity Research Bureau Index) had been dropping since 1980. Long-term interestrates topped out in 1981. Going into the 1980s, therefore, falling commodity pricessignaled that the inflationary spiral of the 1970s had ended. The subsequent drop12
THE LOW-INFLATION ENVIRONMENT AND THE BULL MARKET IN STOCKS
13
in commodity prices and interest rate yields provided a low inflation environment,which fueled strong bull markets in bonds and stocks.In later chapters many of these relationships will be examined in more depth.For now, I'll simply state the basic premise that generally the CRB Index moves inthe same direction as interest rate yields and in the opposite direction of bond prices.Falling commodity prices are generally bullish for bonds. In turn, rising bond pricesare generally bullish for stocks.Figure 2.1 shows the inverse relationship between the CRB Index and Treasurybonds from 1985 through the end of 1987. Going into 1986 bond prices were risingand commodity prices were falling. In the spring of 1986 the commodity price levelbegan to level off and formed what later came to be seen as a "left shoulder" in amajor inverse "head and shoulders" bottom that was resolved by a bullish breakout inthe spring of 1987. Two specific events help explain that recovery in the CRB Index
FIGURE 2.1THE INVERSE RELATIONSHIP BETWEEN BOND PRICES AND COMMODITIES CAN BE SEEN FROM1985 THROUGH 1987. THE BOND MARKET COLLAPSE IN THE SPRING OF 1987 COINCIDEDWITH A BULLISH BREAKOUT IN COMMODITIES. THE BULLISH "HEAD AND SHOULDERS"BOTTOM IN THE CRB INDEX WARNED THAT THE BULLISH "SYMMETRICAL TRIANGLE" INBONDS WAS SUSPECT.Bonds versus CRB Index
14
THE 1987 CRASH REVISITED-AN INTERMARKET PERSPECTIVE
in 1986. One was the Chernobyl nuclear accident in Russia in April 1986 whichcaused strong reflex rallies in many commodity markets. The other factor was thatcrude oil prices, which had been in a freefall from $32.00 to $10.00, hit bottom thesame month and began to rally.Figure 2.1 shows that the actual top in bond prices in the spring of 1986 coin-ided with the formation of the "left shoulder" in the CRB Index. (The bond marketis particularly sensitive to trends in the oil market.) The following year saw sideways movement in both the bond market and the CRB Index, which eventually ledto major trend reversals in both markets in 1987. What happened during the ensuing 12 months is a dramatic example not only of the strong inverse relationshipbetween commodities and bonds but also of why it's so important to take intermarketcomparisons into consideration.The price pattern that the bond market formed throughout the second half of1986 and early 1987 was viewed at the time as a bullish "symmetrical triangle."The pattern is clearly visible in Figure 2.1. Normally, this type of pattern with twoconverging trendlines is a continuation pattern, which means that the prior trend(in this case, the bullish trend) would probably resume. The consensus of technicalopinion at that time was for a bullish resolution of the bond triangle.On its own merits that bullish interpretation seemed fully justified if the technical trader had been looking only at the bond market. However, the trader who wasalso monitoring the CRB Index should have detected the formation of the potentiallybullish "head and shoulders" bottoming pattern. Since the CRB Index and bondprices usually trend in opposite directions, something was clearly wrong. If the CRBindex actually broke its 12-month "neckline" and started to rally sharply, it wouldb? hard to justify a simultaneous bullish breakout in bonds.This, then, is an excellent example of two independent technical readings givingsimultaneous bullish interpretations to two markets that seldom move in the samedirection. At the very least the bond bull should have been warned that his bullishinterpretation might be faulty.Figure 2.1 shows that the bullish breakout by the CRB Index in April 1987 coincided with the bearish breakdown in bond prices. It became clear at that pointthat two major props under the bull market in stocks (rising bond prices and fallingcommodity prices) had been removed. Let's look at what happened between bondsand stocks.THE BOND COLLAPSE- A WARNING FOR STOCKSFigure 2.2 compares the action between bonds and stocks in the three-year periodprior to October 1987. Since 1982 bonds and stocks had been rallying together. Bothmarkets had undergone a one-year consolidation throughout most of 1986. Early in1987 stocks began another advance but for the first time in four years, the stock rallywas not confirmed by a similar rally in bonds. What made matters worse was thebond market collapse in April 1987 (coinciding with the commodity price rally). Atthe very least stock traders who were following the course of events in commoditiesand bonds were warned that something important had changed and that it was timeto start worrying about stocks.What about the long lead time between bonds and stocks? It's true that the stockmarket peak in August 1987 came four months after the bond market collapse that tookplace in April. It's also true that there was a lot of money to be made in stocks duringthose four months (provided the trader exited the stock market on time). However,the action in bonds and commodities warned that it was time to be cautious.
THE BOND COLLAPSE-A WARNING FOR STOCKS
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FIGURE 2.2BONDS USUALLY PEAK BEFORE STOCKS. BONDS PEAKED IN 1986 BUT DIDN'T START TODROP UNTIL THE SPRING OF 1987. THE COLLAPSE IN BOND PRICES IN APRIL OF 1987 (WHICHCOINCIDED WITH AN UPTURN IN COMMODITIES) WARNED THAT THE STOCK MARKET RALLY(WHICH PEAKED IN AUGUST) WAS ON SHAKY GROUND.Bonds versus Stocks
Many traditional stock market indicators gave "sell" signals in advance of theOctober collapse. Negative divergences were evident in many popular oscillators;several mechanical systems flashed "sell" signals; a Dow Theory sell signal was giventhe week prior to the October crash. The problem was that many technically orientedtraders paid little attention to the bearish signals because many of those signals hadoften proven unreliable during the previous five years. The action in the commodityand bond markets might have suggested giving more credence to the bearish technicalwarnings in stocks this time around.Although the rally in the CRB Index and the collapse in the bond market didn'tprovide a specific timing signal as to when to take long profits in stocks, there'sno question that they provided plenty of time for the stock trader to implement amore defensive strategy. By using intermarket analysis to provide a background thatsuggested this stock rally was not on solid footing, the technical trader could havemonitored various stock market technical indicators with the intention of exiting longpositions or taking some appropriate defensive action to protect long profits on thefirst sign of breakdowns or divergences in those technical indicators.
16
THE 1987 CRASH REVISITED-AN INTERMARKET PERSPECTIVE
Figure 2.3 shows bond, commodities, and stocks on one chart for the same threeyear period. This type of chart from 1985 through the end of 1987 clearly shows theinterplay between the three markets. It shows the bullish breakout in the CRB Index,the simultaneous bearish breakdown in bonds in April 1987, and the subsequentstock market peak in August of the same year. The rally in the commodity marketsand bond decline had pushed interest rates sharply higher. Probably more than anyother factor, the surge in interest rates during September and October of 1987 (as adirect result of the action in the other two sectors) caused the eventual downfall ofthe stock market.Figure 2.4 compares Treasury bond yields to the Dow Jones Industrial Average.Notice on the left scale that bond yields rose to double-digit levels (over 10 percent)in October. This sharp jump in bond yields coincided with a virtual collapse inthe bond market. Market commentators since the crash have cited the interest rate
THE ROLE OF THE DOLLAR
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FIGURE 2.4THE SURGE IN BOND YIELDS IN THE SUMMER AND FALL OF 1987 HAD A BEARISH INFLUENCEON STOCKS. FROM JULY TO OCTOBER OF THAT YEAR, TREASURY BOND YIELDS SURGEDFROM 8.50 PERCENT TO OVER 10.00 PERCENT. THE SURGE IN BOND YIELDS WAS TIED TOTHE COLLAPSING BOND MARKET AND RISING COMMODITIES.Interest Rates versus Stocks
FIGURE 2.3A COMPARISON OF BONDS, STOCKS, AND COMMODITIES FROM 1985 THROUGH 1987. THESTOCK MARKET PEAK IN THE SECOND HALF OF 1987 WAS FORESHADOWED BY THE RALLYIN COMMODITIES AND THE DROP IN BOND PRICES DURING THE FIRST HALF OF THATYEAR.Bonds versus Stocks versus CRB Index
surge as the primary factor in the stock market selloff. If that's the case, the wholescenario had begun to play itself out several months earlier in the commodity andbond markets.THE ROLE OF THE DOLLAR
Attention during this discussion of the events of 1987 has primarily focused on thecommodity, bond, and stock markets. The U.S. dollar played a role as well in the autum of 1987. Figure 2.5 compares the U.S. stock market with the action in the dollar.It can be seen that a sharp drop in the U.S. currency coincided almost exactly withthe stock market decline. The U.S. dollar had actually been in a bear market sinceearly 1985. However, for several months prior, the dollar had staged an impressiverally. There was considerable speculation at the time as to whether or not the dollarhad actually bottomed. As the chart in Figure 2.5 shows, however, the dollar rally
18
THE 1987 CRASH REVISITED-AN INTERMARKET PERSPECTIVE
FIGURE 2.5THE FALLING U.S. DOLLAR DURING THE SECOND HALF OF 1987 ALSO WEIGHED ON STOCKPRICES. THE TWIN PEAKS IN THE U.S. CURRENCY IN AUGUST AND OCTOBER OF THAT YEARCOINCIDED WITH SIMILAR PEAKS IN THE STOCK MARKET. THE COLLAPSE IN THE U.S. DOLLARIN OCTOBER ALSO PARALLELED THE DROP IN EQUITIES.Stocks versus the Dollar
SUMMARY
19
RECAP OF KEY RELATIONSHIPS
I'll briefly restate the key relationships here as they were demonstrated in 1987. Insubsequent chapters, I'll break down the relationships more finely and examine eachof them in isolation and in more depth. After examining each of them separately, I'llthen put them all back together again.• Bond prices and commodities usually trend in opposite directions.• Bonds usually trend in the same direction as stocks. Any serious divergencebetween bonds and stocks usually warns of a possible trend reversal in stocks.• A falling dollar will eventually cause commodity prices to rally which in turnwill have a bearish impact on bonds and stocks. Conversely, a rising dollar willeventually cause commodity prices to weaken which is bullish for bonds andstocks.LEADS AND LAGS IN THE DOLLAR
peaked in August along with the stock market. A second rally failure by the dollar inOctober and its subsequent plunge coincided almost exactly with the stock marketselloff. It seems clear that the plunge in the dollar contributed to the weakness inequities.Consider the sequence of events going into the fall of 1987. Commodity priceshad turned sharply higher, fueling fears of renewed inflation. At the same time interestrates began to soar to double digits. The U.S. dollar, which was attempting to endits two-year bear market, suddenly went into a freefall of its own (fueling even moreinflation fears). Is it any wonder, then, that the stock market finally ran into trouble?Given all of the bearish activity in the surrounding markets, it's amazing the stockmarket held up as well as it did for so long. There were plenty of reasons whystocks should have sold off in late 1987. Most of those reasons, however, were visiblein the action of the surrounding markets and not necessarily in the stock marketitself.
The role of the dollar in 1987 isn't as convincing as that of bonds and stocks. Despiteits plunge in October 1987, which contributed to stock market weakness, the dollarhad already been falling for over two years. It's important to recognize that althoughthe dollar plays an important role in the intermarket picture, long lead times mustat times be taken into consideration. For example, the dollar topped in the springof 1985. That peak in the dollar started a chain of events in motion and led to theeventual bottom in the CRB Index and tops in bonds and stocks. However, the bottomin the commodity index didn't take place until a year after the dollar peak. A fallingdollar becomes bearish for bonds and stocks when its inflationary impact begins topush commodity prices higher.Although my analysis begins with the dollar, it's important to recognize thatthere's really no starting point in intermarket work. The dollar affects commodityprices, which affect interest rates, which in turn affect the dollar. A period of fallinginterest rates (1981—1986) will eventually cause the dollar to weaken (1985); theweaker dollar will eventually cause commodities to rally (1986—1987) along withhigher interest rates, which is bearish for bonds and stocks (1987). Eventually thehigher interest rates will pull the dollar higher, commodities and interest rates willpeak, exerting a bullish influence on bonds and stocks, and the whole cycle startsover again.Therefore, it is possible to have a falling dollar along with falling commodityprices and rising financial assets for a period of time. The trouble starts when commodities turn higher. Of the four sectors that we will be examining, the role of theU.S. dollar is probably the least precise and the one most difficult to pin down.SUMMARY
The events of 1987 provided a textbook example of how the financial markets interrelate with each other and also an excellent vehicle for an overview of the fourmarket sectors. I'll return to this time period in Chapters 8, 10, and 13, which discuss various other intermarket features, such as the business cycle, the internationalmarkets, and the leading action of the Dow Jones Utility Average. Let's now take acloser look at the most important relationship in the intermarket picture: the linkagebetween commodities and bonds.
3
THE KEY IS INFLATION
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FIGURE 3.1A DEMONSTRATION OF THE POSITIVE CORRELATION BETWEEN THE CRB INDEX AND10-YEAR TREASURY YIELDS FROM 1973 THROUGH 1987. (SOURCE- CRB INDEX WHITE PAPER:AN INVESTIGATION INTO NON-TRADITIONAL TRADING APPLICATIONS FOR CRB INDEXFUTURES, PREPARED BY POWERS RESEARCH, INC., 30 MONTGOMERY STREET, JERSEY CITY,NJ 07302, MARCH 1988.)CRB Index versus 10-Year Treasuries(Monthly averages from 1973 to 1987)
Commodity Prices and Bonds
Of all the intermarket relationships explored in this book, the link betweencommodity markets and the Treasury bond market is the most important. Thecommodity-bond link is the fulcrum on which the other relationships are built.It is this inverse relationship between the commodity markets (represented by theCommodity Research Bureau Futures Price Index) and Treasury bond prices thatprovides the breakthrough linking commodity markets and the financial sector.Why is this so important? If a strong link can be established between thecommodity sector and the bond sector, then a link can also be established betweenthe commodity markets and the stock market because the latter is influenced to alarge extent by bond prices. Bond and stock prices are both influenced by the dollar.However, the dollar's impact on bonds and stocks comes through the commoditysector. Movements in the dollar influence commodity prices. Commodity pricesinfluence bonds, which then influence stocks. The key relationship that binds allfour sectors together is the link between bonds and commodities. To understand whythis is the case brings us to the critical question of inflation.THE KEY IS INFLATION
The reason commodity prices are so important is because of their role as a leadingindicator of inflation. In Chapter 7, I'll show how commodity markets lead otherpopular inflation gauges such as the Consumer Price Index (CPI) and the ProducerPrice Index (PPI) by several months. We'll content ourselves here with the generalstatement that rising commodity prices are inflationary, while falling commodityprices are non-inflationary. Periods of inflation are also characterized by risinginterest rates, while noninflationary periods experience falling interest rates. Duringthe 1970s soaring commodity markets led to double-digit inflation and interest rateyields in excess of 20 percent. The commodity markets peaked out in 1980 anddeclined for six years, ushering in a period of disinflation and falling interest rates.The major premise of this chapter is that commodity markets trend in the samedirection as Treasury bond yields and in the opposite direction of bond prices. Sincethe early 1970s every major turning point in long-term interest rates has been accompanied by or preceded by a major turn in the commodity markets in the samedirection. Figure 3.1 shows that the CRB Index and interest rates rose simultaneously20
during the early 1970s, trended sideways together from 1974 to 1977, and then rosedramatically into 1980. In late 1980 commodity prices began to drop sharply. Bondyields topped out a year later in 1981. Commodities and bond yields dropped togetherto mid-1986 when both measures troughed out together.For those readers who are unfamiliar with Treasury bond pricing, it's importantto recognize that bond prices and bond yields move in opposite directions. WhenTreasury bond yields are rising (during a period of rising inflation like the 1970s),bond prices fall. When bond yields are falling (during a period of disinflation likethe early 1980s), bond prices are rising. This is how the inverse relationship betweenbond prices and commodity prices is established. If it can be shown that interest rateyields and commodity prices trend in the same direction, and if it is understood thatbond yields and bond prices move in opposite directions, then it follows that bondprices and commodity prices trend in opposite directions.
COMMODITY PRICES AND BONDSECONOMIC BACKGROUND
It isn't necessary to understand why these economic relationships exist All thatis necessary is the demonstration that they do exist and the application of thatknowledge m trading decisions. The purpose in this and succeeding chapters is todemonstrate that these relationships do exist and can be used to advantage in marketanalysis. However, it is comforting to know that there are economic explanations asto why commodities ana interest rates move in the same directionDuring a period of economic expansion, demand for raw materials increasesalong with the demand for money to fuel the economic expansion. As a resultprices of commodities rise along with the price of money (interest rates). A period ofrising commodity prices arouses fears of inflation which prompts monetary authorities to raise interest rates to combat that inflation. Eventually, the rise in interest rateschokes off the economic expansion which leads to the inevitable economic slowdown and recession. During the recession demand for raw materials and moneydecreases, resulting in lower commodity prices and interest rates. Although it'snot the mam concern in this chapter, it should also be obvious that activity inthe bond and commodity markets can tell a lot about which way the economy is heading
MARKET HISTORY IN THE 1980sComparison of the bond and commodity markets begins with the events leading upto and following the major turning points of the 1980-1981 period which ended theinflationary spiral of the 1970s and began the disinflationary period of the 1980sThis provides a useful background for closer scrutiny of the market action of the pastfive years. The major purpose in this chapter is simply to demonstrate that a stronginverse relationship exists between the CRB Index and the Treasury bond market:o suggest ways that the trader or analyst could have used this information toadvantage Since the focus is on the Commodity Research Bureau Futures Price Indexa bnet explanation is necessary.The CRB Index, which was created by the Commodity Research Bureau in1956, Presents a basket of 21 actively-traded commodity markets. It is the mostwidely-watched barometer of general commodity price trends and is regarded asthe commodity markets' equivalent of the Dow Jones Industrial Average. It includesgrams livestock, tropical, metals, and energy markets. It uses 1967 as its baseyear. While other commodity indexes provide useful trending information, the wideacceptance of the CRB Index as the main barometer of the commodity markets, thetact that all of its components are traded on futures markets, and the fact that it is theonly commodity index that is also a futures contract itself make it the logical choicefor intermarket comparisons. In Chapter 7, I'll explain the CRB Index in more depthand compare it to some other commodity indexes.The 1970s witnessed virtual explosions in the commodity markets, which ledto spiraling inflation and rising interest rates. From 1971 to 1980 the CRB Indexappreciated in value by approximately 250 percent. During that same period of timebond yields appreciated by about 150 percent. In November of 1980, however acollapse in the CRB Index signaled the end of the inflationary spiral and began thedisinflationary period of the 1980s. (An even earlier warning of an impending top inthe commodity markets was sounded by the precious metals markets which began tofall during the first quartet of 1980.). Long-term bond rates continued to rise into themiddle of 1981 before finally peaking in September of that year
MARKET HISTORY IN THE 1980s
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The 1970s had been characterized by rising commodity prices and a weak bondmarket. In the six years after the 1980 peak, the CRB Index lost 40 percent of itsvalue while bond yields dropped by about half. The inflation rate descended fromthe 12—13 percent range at the beginning of the 1980s to its lowpoint of 2 percent in1986. The 1980 peak in the CRB Index set the stage for the major bottom in bondsthe following year (1981). A decade later the 1980 top in the CRB Index and the 1981bottom in the bond market have still not been challenged.The disinflationary period starting in 1980 saw falling commodity markets alongwith falling interest rates (see Figure 3.1). One major interruption of those trends tookplace from the end of 1982 through early 1984, when the CRB Index recovered abouthalf of its earlier losses. Not surprisingly during that same time period interest ratesrose. In mid-1984, however, the CRB index resumed its major downtrend. At the sametime that the CRB Index was resuming its decline, bond yields started the second legof their decline that lasted for another two years. Figure 3.2 compares the CRB Indexand bond yields on a rate of change basis.FIGURE 3.2THE LINKAGE BETWEEN THE CRB INDEX AND TREASURY BOND YIELDS CAN BE SEEN ON A12-MONTH RATE OF CHANGE BASIS FROM 1964 TO 1986. (SOURCE: COMMODITY RESEARCHBUREAU, 75 WALL