Intermarket Analysis: Profiting from Global Market Relationships

CHAPTER 3

The Stealth Bear Market of 1994

THINGS LOOK GOOD FROM 1990 THROUGH 1993

Immediately after the Persian Gulf War, intermarket trends turned favorable again for the next three years. From early 1991 to the end of 1993, bond and stock prices rose together. Commodities were generally weak. The U.S. dollar, which bottomed early in 1991, was firm. A dip in the dollar from mid-1991 to mid-1992 did not cause much damage to bonds and stocks, mainly because commodities remained weak. (Recall that a falling dollar only hurts bonds and stocks when commodities are rising.) Things started going badly for stocks, however, during the first quarter of 1994, then got steadily worse as the year progressed. Bond prices fell along with stocks as commodity prices rose. The rise in commodities was aided by a falling U.S. dollar, which peaked at the start of 1994 and fell during the rest of the year. Rising commodity prices and a falling dollar proved to be a bad intermarket recipe for bonds and stocks. As is usually the case, however, early warning signs showed up in the bond and commodity markets the previous year. Let’s take a look.

A DESCRIPTION OF THE CRB INDEX

The CRB Index is the most widely followed measure of commodity price direction. During 1993 and 1994, it was made up of 21 commodity markets. Changes to the index in late 1995 reduced the number from 21 to 17. However, it still includes all of the major commodity groups: industrial metals, precious metals, energy, grain, livestock, ...