in December 1987 coincided with a major bottom in the dollar. The dollar peak inthe summer of 1989 coincided with a major low in the gold market. The gold marketleads turns in the CRB Index. The CRB Index in turn has a strong inverse relationshipwith a bond market. And, of course, bonds tend to lead the stock market. Since goldstarts to trend upward prior to the CRB Index, it's possible to have a rising gold marketalong with bonds and stocks (1985-1987).A major bottom in the gold market (which usually coincides with an important top in the dollar) is generally a warning that inflation pressures are just starting to build and will in time become bearish for bonds and stocks. A gold market top(which normally accompanies a bottom in the dollar) is an early indication of alessening in inflation pressure and will in time have a bullish impact on bondsand stocks. However, it is possible for gold to drop along with bonds and stocks fora time.It's important to recognize the role of gold as a leading indicator of inflation.Usually in the early stages of a bull market in gold, you'll read in the papers thatthere isn't enough inflation to justify the bull market since gold needs an inflationaryenvironment in which to thrive. Conversely, when gold peaks out (in 1980 for example), you'll read that gold should not drop because of the rising inflation trend. Don'tbe misled by that backward thinking. Gold doesn't react to inflation; it anticipatesinflation. That's why gold peaked in January of 1980 at a time of double-digit inflationand correctly anticipated the coming disinflation. That's also why gold bottomed in1985, a year before the disinflation trend of the early 1980s had run its course. Thenext time gold starts to rally sharply and the economists say that there are no signsof inflation on the horizon, begin nibbling at some inflation hedges anyway. And thenext time the stock market starts to look toppy, especially if the dollar is dropping,consider some gold mining shares.
INTEREST-RATE DIFFERENTIALS
equities since 1982. Much of what was said in the previous section, in our comparisonbetween commodities and stocks, holds true for gold as well. During periods of fallinginflation, stocks outperform gold by a wide margin (1980 to 1985 and 1988 throughthe first half of 1989). During periods of rising inflation (the 1970s and the period from1986 through the end of 1987), gold becomes a valuable addition to one's portfolio ifnot an outright alternative to stocks.The period from 1988 through the middle of 1989 shows stocks and gold trendingin opposite directions. This period coincided with general falling commodity pricesand a rising dollar. Clearly, the wise place to be was in stocks and not gold. However, the sharp setback in the dollar in mid-1989 gave warning that things might bechanging. Sustained weakness in the dollar would not only begin to undermine oneof the bullish props under the stock market but would also provide support to thegold market, which benefits from dollar weakness.
The attractiveness of the dollar, relative to other currencies, is also a function ofinterest rate differentials with those other countries. In other words, if U.S. ratesare high relative to overseas interest rates, this will help the dollar. If U.S. ratesstart to weaken relative to overseas rates, the dollar will weaken relative to overseascurrencies. Money tends to flow toward those currencies with the highest interestrate yields and away from those with the lowest yields. This is why it's important tomonitor interest rates on a global scale.Any unilateral central bank tightening by overseas trading partners (usually tostem fears of rising domestic inflation) or U.S. easing will be supportive to overseascurrencies and bearish for the dollar. Any unilateral U.S. tightening or overseas easing will strengthen the dollar. This explains why central bankers try to coordinatemonetary policy to prevent unduly upsetting foreign exchange rates. In determiningthe impact on the dollar, then, it's not just a matter of which way interest rates aretrending in this country but how they're trending in the United States relative tooverseas interest rates.
94
THE DOLLAR VERSUS INTEREST RATES AND STOCKS
7
SUMMARYThis chapter shows the strong link between the dollar and interest rates. The dollarhas an important influence on the direction of interest rates. The direction of interestrates has a delayed impact on the direction of the dollar. The result is a circularrelationship between the two. Short-term rates have more direct impact on the dollarthan long-term rates. A falling U.S. dollar will eventually have a bearish impacton financial assets in favor of tangible assets. During times of severe stock marketweakness, the dollar will usually fall as a result of Federal Reserve easing. Risingcommodity prices will in time become bearish for stocks. Falling commodity pricesusually precede an upturn in equities. Gold acts as a leading indicator of inflation anda safe haven during times of political and financial upheavals. The normal sequenceof events among the various sectors is as follows:•••••••••••
Rising interest rates pull the dollar higher.Gold peaks.The CRB Index peaks.Interest rates peak; bonds bottom.Stocks bottom.Falling interest rates pull the dollar lower.Gold bottoms.The CRB Index bottoms.Interest rates turn up; bonds peak.Stocks peak.Rising interest rates pull the dollar higher.
This chapter completes the direct comparison of the four market sectors—currencies,commodities, interest rate, and stock index futures. Of the four sectors, the one thathas been the most neglected and the least understood by the financial communityhas been commodities. Because of the important role commodity markets play in theintermarket picture and their ability to anticipate inflation, the next chapter will bedevoted to a more in-depth study of the commodity sector.
Commodity Indexes
One of the key aspects of intermarket analysis, which has been stressed repeatedlyin the preceding chapters, has been the need to incorporate commodity prices intothe financial equation. To do this, the Commodity Research Bureau Futures PriceIndex has been employed to represent the commodity markets. The CRB Index is themost widely watched barometer of the general commodity price level and will remainthroughout the text as the major tool for analyzing commodity price trends. However,to adequately understand the workings of the CRB Index, it's important to know whatmakes it run. Although all of its 21 component markets are equally weighted, someindividual commodity markets are more important than others. We'll consider theimpact various commodities have on the CRB Index and why it's important to monitorthose individual markets.In addition to monitoring the individual commodity markets that comprise theCRB Index, it's also useful to consult the Futures Group Indexes published by theCommodity Research Bureau. A quick glance at these group indexes tells the analystwhich commodity groups are the strongest and the weakest at any given time. Someof these futures groups have more impact on the CRB Index than others and meritspecial attention. The precious metals and the energy groups are especially importantbecause of their impact on the overall commodity price level and their wide acceptance as barometers of inflation. I'll show how it's possible to view each group asa whole instead of just as individual markets. The relationship between the energyand precious metals sectors will be discussed to see if following one sector providesany clues to the direction of the other. Finally, movements in the energy and metalssectors will be compared to interest rates to see if there is any correlation.There are several other commodity indexes that should be monitored in additionto the CRB Index. Although most broad commodity indexes normally trend in thesame direction, there are times when their paths begin to differ. It is precisely atthose times, when the various commodity indexes begin to diverge from one another,that important warnings of possible trend changes are being sent. To understand thesedivergences, the observer should understand how the various indexes are constructed.First the CRB Futures Index will be compared to the CRB Spot Index. Analystsoften confuse these two indexes. However, the CRB Spot Index is comprised of spot(cash) prices instead of futures prices and has a heavier industrial weighting than95
96
COMMODITY INDEXES
the CRB Futures Index. The CRB Spot Index is broken down into two other indexes,Spot Foodstuffs and Spot Raw Industrials. The Raw Industrials Index is especiallyfavored by economic forecasters. Another index favored by many economists is theJournal of Commerce (fOC) Industrial Materials Price Index.The debate as to which commodity index does a better job of predictinginflation centers around the relative importance of industrial prices versus foodprices. Economists seem to prefer industrial prices as a better barometer of inflation and economic strength. However, the financial markets seem to prefer the morebalanced CRB Futures Index, which includes both food and industrial prices. Although the debate won't be resolved in these pages, I'll try to shed some light on thesubject.COMMODITY PRICES, INFLATION, AND FED POLICYUltimately, inflation pressures are reflected in the Producer Price Index (PPI) andthe Consumer Price Index (CPI). I'll show how monitoring trends in the commoditymarkets often provides clues months in advance as to which way the inflation windsare blowing. Since the Federal Reserve Board's primary goal is price stability, it shouldcome as no surprise to anyone that the Fed watches commodity indexes very closelyto help determine whether price pressures are intensifying or diminishing. What theFed itself has said regarding the importance of commodity prices as a tool for settingmonetary policy will be discussed.HOW TO CONSTRUCT THE CRB INDEXSince we've placed so much importance on the CRB Index, let's explain how it isconstructed and which markets have the most influence on its movements. The Commodity Research Bureau Futures Price Index was first introduced in 1956 by thatorganization. Although it has undergone many changes in the ensuing 30 years, it iscurrently comprised of 21 active commodity markets. The key word here is commodity. The CRB Index does not include any financial futures. It is a commodity index,pure and simple. The calculation of the CRB Index takes three steps:1. Each of the Index's 21 component commodities is arithmetically averaged usingthe prices for all of the futures months which expire on or before the end of theninth calendar month from the current date. This means that the Index extendsbetween nine and ten months into the future depending on where one is in thecurrent month.2. These 21 component arithmetic averages are then geometrically averaged by multiplying all of the numbers together and taking their 21st root.3. The resulting value is divided by 53.0615, which is the 1967 base-year averagefor these 21 commodities. That result is then multiplied by an adjustment factorof .94911. (This adjustment factor is necessitated by the Index's July 20, 1987changeover from 26 commodities averaged over 12 months to 21 commoditiesaveraged over 9 months.) Finally, that result is multiplied by 100 in order toconvert the Index into percentage terms:
GROUP CORRELATION STUDIES
97
All of the 21 commodity markets that comprise the CRB Index are themselvestraded as futures contracts and cover the entire spectrum of commodity markets. Inalphabetical order, the 21 commodities in the CRB Index are as follows:Cattle (Live), Cocoa, Coffee, Copper, Cora, Cotton, Crude Oil, Gold (New York), Heating Oil (No. 2), Hogs, Lumber, Oats (Chicago), Orange Juice, Platinum, Pork Bellies, Silver (New York), Soybeans, Soybean Meal, Soybean Oil, Sugar "11" (World),Wheat (Chicago)
Each of the 21 markets in the CRB Index carries equal weight in the precedingformula, which means that each market contributes 1/21 (4.7%) to the Index's value.However, although each individual commodity market has equal weight in the CRBIndex, this does not mean that each commodity group carries equal weight. Somecommodity groups carry more weight than others. The following breakdown dividesthe CRB Index by groups to give a better idea how the weightings are distributed:MEATS:METALS:IMPORTED:ENERGY:GRAINS:INDUSTRIALS:
Cattle, hogs, porkbellies (14.3%)Gold, platinum, silver (14.3%)Cocoa, coffee, sugar (14.3%)Crude oil, heating oil (9.5%)Corn, oats, wheat, soybeans, soybean meal, soybean oil (28.6%)Copper, cotton, lumber (14.3%)
A quick glance at the preceding breakdown reveals two of the major criticisms ofthe CRB Index—first, the heavier weighting of the agricultural markets (62%) versusthe non-food markets (38%) and, second, the heavy weighting of the grain sector(28.6%) relative to the other commodity groupings. The heavy weighting of the agricultural markets has caused some observers to question the reliability of the CRBIndex as a predictor of inflation, a question which will be discussed later. The heavygrain weighting reveals why it is so important to follow the grain markets when analyzing the CRB Index, which leads us to our next subject—the impact various marketsand market groups have on the CRB Index.'GROUP CORRELATION STUDIESA comparison of how the various commodity groups correlate with the CRB Indexfrom 1984 to 1989 shows that the Grains have the strongest correlation with the Index(84%). Two other groups with strong correlations are the Industrials (67%)*and theEnergy markets (60%). Two groups that show weak correlations with the Index arethe Meats (33%) and the Imported markets (-4%). The Metals group has a pooroverall correlation to the CRB Index (15.98%). However, a closer look at the six yearsunder study reveals that, in four of the six years, the metal correlations were actuallyquite high. For example, positive correlations between the Metals and the CRB Indexwere seen in 1984 (93%), 1987 (74%), 1988 (76%), and the first half of 1989 (89%).(Source: CRB Index Futures Reference Guide, New York Futures Exchange, 1989.)Correlation studies performed for the 12-month period ending in October 1989show that the grain complex remained the consistent leader during that time span'Copper, cotton, crude oil, lumber, platinum, silver
98
COMMODITY INDEXES
and confirmed the longer-range conclusions discussed in the previous paragraph. Inthe 12 months from October 1988 to October 1989, the strongest individual comparisons with the CRB Index were shown by soybean oil (93%), corn (92.6%), soybeans(92.5%), soybean meal (91%), and oats (90%). The metals as a group also showedstrong correlation with the CRB Index during the same time span: silver (86%), gold(77%), platinum (75%). (Source: Powers Associates, Jersey City, NJ)GRAINS, METALS, AND OILS
The three most important sectors to watch when analyzing the CRB Index are thegrains, metals, and energy markets. The oil markets earn their special place becauseof their high correlation ranking with the CRB Index and because of oil's importanceas an international commodity. The metals also show a high correlation in most years.However, the special place in our analysis earned by the metals markets (gold in particular] is because of their role as a leading indicator of the CRB Index (discussed, inChapter 5) and their wide acceptance as leading indicator of inflation. The importantplace reserved for the grain markets results from their consistently strong correlationwith the CRB Index.Most observers who track the CRB Index are quite familiar with the oil and goldmarkets and follow those markets regularly. However, the CRB Index is often drivenmore by the grain markets, which are traded in Chicago, than by the gold and oilmarkets, which are traded in New York. A dramatic example of the grain influence wasseen during the midwest drought of 1988, when the grain markets totally dominatedthe CRB Index for most of the spring and summer of that year. A thorough analysisof the CRB Index requires the monitoring of all 21 component markets that comprisethe Index. However, special attention should always be paid to the precious metals,energy, and grain markets.CRB FUTURES VERSUS THE CRB SPOT INDEX
The same six-year study referred to in the paragraph on "Group Correlation Studies" in Chapter 7 (p. 97) contained another important statistic, which has relevanceto our next subject—a comparison of the CRB Futures Index to the CRB Spot Index. During the six years from 1984 to the middle of 1989, the correlation between these two CRB Indexes was an impressive 87 percent. In four out of the sixyears, the correlation exceeded 90 percent. What these figures confirm is that, despite their different construction, the two CRB Indexes generally trend in the samedirection.Despite the emphasis on the CRB Futures Index in intermarket analysis, it's important to look to other broad-based commodity indexes for confirmation of what theCRB Futures Index is doing. Divergences between commodity indexes usually containan important message that the current trend may be changing. The other commodityindexes will sometimes lead the CRB Futures Index and, in so doing, can provideimportant intermarket warnings. Study of the CRB Spot Index also takes us into adeeper discussion of the relative importance of industrial prices.HOW THE CRB SPOT INDEX IS CONSTRUCTED
First of all, the CRB Spot Index is made up of cash (spot) prices instead of futuresprices. Second, it includes several commodities that are not included in the CRB
THE JOURNAL OF COMMERCE (JOC) INDEX
99
Futures Index. Third, it has a heavier industrial weighting. The 23 spot prices thatcomprise the CRB Spot Index are as follows in alphabetical order:Burlap, butter, cocoa, copper scrap, corn, cotton, hides, hogs, lard, lead, print cloth,rosin, rubber, soybean oil, steel scrap, steers, sugar, tallow, tin, wheat (Minneapolis),wheat (Kansas City), wool tops, and zinc
There are 23 commodity prices in the CRB Spot Index, while the CRB FuturesIndex has 21. Prices included in the CRB Spot Index that are not in the CRB FuturesIndex are burlap, butter, hides, lard, lead, print cloth, rosin, rubber, steel scrap, tallow,tin, wool tops, and zinc. One other significant difference is in the industrial weighting.Of the 23 spot prices included in the CRB Spot Index, 13 are industrial prices fora weighting of 56 percent. This contrasts with a 38 percent industrial weighting inthe CRB Futures Index. It is this difference in the industrial weightings that accountsfor the occasional divergences that exist between the Spot and Futures Indexes. Tosee why the heavier industrial weighting of the CRB Spot Index can make a majordifference in its performance, divide the Spot Index into its two sub-indexes—TheSpot Raw Industrials and the Spot Foodstuffs.RAW INDUSTRIALS VERSUS FOODSTUFFS
In spite of their different composition, the CRB Futures and Spot Indexes usuallytrend in the same direction. To fully understand why they diverge at certain times,it's important to consult the two sub-indexes that comprise the CRB Spot Index—theSpot Raw Industrials and the Spot Foodstuffs. Significantly different trend picturessometimes develop in these two sectors. For example, the Raw Industrial Index bottomed out in the summer of 1986, whereas the Foodstuffs didn't bottom out untilthe first quarter of 1987. The Foodstuffs, on the other hand, peaked in mid-1988 anddropped sharply for a year. The Raw Industrials continued to advance into the firstquarter of 1989. While the Raw Industrials turned up first in mid-1986, the Foodstuffsturned down first in mid-1988.By understanding how industrial and food prices perform relative to one another, the analyst gains a greater understanding into why some of the broader commodity indexes perform so differently at certain times. Some rely more heavily on industrial prices and some, like the CRB Futures Index, are more food-oriented. Manyeconomists believe that industrial prices more truly reflect inflation pressures andstrength or weakness in the economy than do food prices, which are more influenced by such things as agricultural subsidies, weather, and political considerations.Still, no one denies that food prices do play a role in the inflation picture. Onepopular commodity index goes so far as to exclude food prices completely. Sinceits creation in 1986, the Journal of Commerce (JOC) Index has gained a following among economists and market observers as a reliable indicator of commodityprice pressures.THE JOURNAL OF COMMERCE (JOC) INDEX
This index of 18 industrial materials prices was developed by the Center for International Business Cycle Research (CIBCR) at Columbia University and has beenpublished daily since 1986. Its subgroupings include textiles, metals, petroleum products, and miscellaneous commodities. The components of the JOC Index were chosen
100
COMMODITY INDEXES
specifically because of their success in anticipating inflation trends. The 18 commodities included in the JOG Index are broken down into the following subgroupings:METALS:aluminum, copper scrap, lead, steel scrap, tin, zincTEXTILES:burlap, cotton, polyester, print clothPETROLEUM: crude oil, benzeneMISC:hides, rubber, tallow, plywood, red oak, old corrugated boxes
THE JOC INDEX AND RAW INDUSTRIALS
101
FIGURE 7.1A COMPARISON OF THE CRB FUTURES INDEX AND THE CRB SPOT INDEX FROM 1987 TO1989. ALTHOUGH THESE TWO INDEXES HAVE A STRONG HISTORICAL CORRELATION, THEYSOMETIMES DIVERGE AS IN 1989. WHILE THE CRB SPOT INDEX HAS A HEAVIER INDUSTRIALWEIGHTING, THE CRB FUTURES INDEX HAS A HEAVIER AGRICULTURAL WEIGHTING.CRB Futures Index
The JOG Index has been compiled back to 1948 on a monthly basis and, accordingto its creators, has established a consistent track record anticipating inflation trends.It can also be used to help predict business cycles, a subject which will be tackledin Chapter 13. One possible shortcoming in the JOG Index is its total exclusion offood prices. Why the exclusion of food prices can pose problems was demonstratedin 1988 and 1989 when a glaring divergence developed between food and industrialprices. This resulted in a lot of confusion as to which of the commodity indexes weregiving the truer inflation readings.VISUAL COMPARISONS OF THE VARIOUS COMMODITY INDEXES
This section shows how the various commodity indexes performed over the pastfew years and, at the same time, demonstrates why it's so important to know whatcommodities are in each index. It will also be shown why it's dangerous to excludefood prices completely from the inflation picture. Figure 7.1 compares the CRB Futures Index to the CRB Spot Index from 1987 to 1989. Historically, both indexes havenormally traded in the same direction.The CRB Futures Index peaked in the summer of 1988 at the tail end of the midwestern drought that took place that year. The Futures Index then declined until thefollowing August before stabilizing again. The CRB Spot Index, however, continued torally into March of 1989 before turning downward. From August of 1989 into yearend,the CRB Futures Index trended higher while the CRB Spot Index dropped sharply.Clearly, the two indexes were "out of sync" with one another. The explanation lieswith the relative weighting of food versus industrial prices in each index.FOODSTUFFS VERSUS RAW INDUSTRIALS
Figure 7.2 shows the Spot Foodstuffs and the Spot Raw Industrials Indexes from1985 through 1989. The 23 commodities that are included in these two indexes arecombined in the CRB Spot Index. An examination of the Raw Industrials and theFoodstuffs helps explain the riddle as to why the CRB Spot and the CRB FuturesIndexes diverged so dramatically in late 1988 through the end of 1989. It also explainswhy the Journal of Commerce Index, which is composed exclusively of industrialprices, gave entirely different readings than the CRB Futures Price Index.In the summer of 1986, Raw Industrials turned higher and led the upturn inthe Foodstuffs by half a year. Both indexes trended upward together until mid-1988when the Foodstuffs (and the CRB Futures Index) peaked and began a yearlongdescent. The Raw Industrials rose into the spring of 1989 before rolling over to thedownside. The Raw Industrials led at the 1986 bottom, while the Foodstuffs led atthe 1988 peak.
Figure 7.3 puts all four indexes in proper perspective. The upper chart comparesthe CRB Futures and Spot Indexes. The lower chart compares the Spot Foodstuff andthe Raw Industrial Indexes. Notice that the CRB Futures Index tracks the Foodstuffsmore closely, whereas the CRB Spot Index is more influenced by the Raw Industrials.The major divergence between the CRB Futures and the CRB Spot Indexes is betterexplained if the observer understands their relative weighting of industrial pricesrelative to food prices and also keeps an eye on the two Spot sub-indexes.THE JOC INDEX AND RAW INDUSTRIALS
Figure 7.4 shows the close correlation between the Raw Industrials Index and the Journal of Commerce Index. This should come as no surprise since both are composedexclusively of industrial prices. (One important difference between the two indexes isthat the JOC Index has a 7.1 percent petroleum weighting whereas the Raw Industrials Index includes no petroleum prices., The CRB Futures Index, by contrast, has a 9.5
THE JOC INDEX AND RAW INDUSTRIALS102
103
COMMODITY INDEXESFIGURE 7.3
FIGURE 7.2CRB SPOT FOODSTUFFS INDEX VERSUS THE CRB SPOT RAW INDUSTRIALS FROM 1985 TO1989. INDUSTRIAL PRICES TURNED UP FIRST IN 1986. HOWEVER, FOOD PRICES PEAKEDFIRST IN 1988. IT'S IMPORTANT WHEN MEASURING INFLATION TRENDS TO LOOK AT BOTHMEASURES.Spot Foodstuffs
A COMPARISON OF THE CRB SPOT AND CRB FUTURES INDEXES (UPPER CHART) WITH THECRB SPOT RAW INDUSTRIALS AND CRB SPOT FOODSTUFFS (LOWER CHART). THE CRB FUTURES INDEX TRACKS THE FOODSTUFFS MORE CLOSELY, WHILE THE CRB SPOT INDEX ISMORE CLOSELY CORRELATED WITH THE RAW INDUSTRIALS. THE CRB SPOT INDEX IS SUBDIVIDED INTO THE SPOT RAW INDUSTRIALS AND THE SPOT FOODSTUFFS.
104
COMMODITY INDEXES
FIGURE 7.4A COMPARISON OF THE CRB SPOT RAW INDUSTRIALS WITH THE JOURNAL OF COMMERCE(JOC) INDEX. SINCE BOTH INCLUDE ONLY INDUSTRIAL PRICES, THEY CORRELATE VERYCLOSELY.Spot Raw Industrials
THE CRB FUTURES INDEX VERSUS THE JOC INDEX
105
FIGURE 7.5THE CRB FUTURES PRICE INDEX VERSUS THE JOURNAL OF COMMERCE (JOC) INDEX FROM1985 TO 1989. SINCE THE CRB FUTURES INDEX INCLUDES FOOD PRICES WHILE THE JOCINDEX INCLUDES ONLY INDUSTRIAL PRICES, THESE TWO INDEXES OFTEN DIVERGE FROMEACH OTHER. IT'S IMPORTANT, HOWEVER, TO CONSIDER BOTH FOR A THOROUGH ANALYSISOF COMMODITY PRICE TRENDS.CRB Futures Index
percent energy weighting.) Notice how closely the two industrial indexes resembleeach other. They both bottomed together in mid-1986 and peaked in 1989. The lastrecovery high in the JOC Index in late 1989, however, was not confirmed by the RawIndustrial Index, providing early warning that the JOC uptrend might be changing.That's another reason why it's so important to consult all of these indexes and notrely on just one or two. Having shown the important differences between food andindustrial prices, now the CRB Futures Index will be compared with the Journal ofCommerce Index.THE CRB FUTURES INDEX VERSUS THE JOC INDEX
Figures 7.5 and 7.6 compare these two commodity indexes first from a longer view(1985 through 1989) and then a shorter view (mid-1988 to the end of 1989). Notsurprisingly, the JOC Index rose faster in 1986 as industrial prices led the commodityadvance. The more balanced CRB Index didn't accelerate upward until the followingspring. In this case, the JOC Index was the stronger and gave an excellent leadingsignal that inflation pressures were awakening.
The picture gets cloudier from mid-1988 on. The CRB Index, heavily influencedby a major top in the grain markets, peaked in the summer of 1988. Futures pricesdeclined until the following August before showing signs of stabilization. Meanwhile,the JOC Index continued to set new highs into the fall of 1989. Figure 7.6 shows 1989in more detail. For most of that year, the CRB Index and the JOC Index trended inopposite directions. During the first half of 1989, the JOC Index strengthened whilethe CRB Index weakened. By the time the JOC Index started to weaken in October of1989, the CRB Index was already beginning to rally.Anyone consulting these two indexes for signs of which way inflation was going got completely opposite readings. The JOC Index was predicting higher inflationthroughout most of 1989, while the CRB Index was saying that inflation had peakedin 1988. Going into the end of 1989, the JOC Index was predicting a slowdown of inflation, whereas the firmer CRB Index was predicting an uptick in inflation pressures.What is the intermarket trader to do at such times?
106
COMMODITY INDEXES
FIGURE 7.6THE CRB FUTURES PRICE INDEX VERSUS THE JOURNAL OF COMMERCE (JOC) INDEX DURING1988 AND 1989.