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Friday, 12 August 2011

Inflation: Topping? Maybe...

The inflationary heat has faded slightly, as some commodities are moving away from the top. Will it last? Forecasting the future is always a challenging art. However, 60 years of history can give us a broad idea of current market dynamic. Pressure on prices, within tops and bottoms, is here to stay for now, but the trend will not last forever. Let us see how.

Inflation: 4/5 years time span from top to top?

 Since 1950, the CRB commodity index, it averages a basket of 19 commodities, had two inflationary cycles. One has topped in 1951, while the other finished in 1980 (29 years time span). From bottom to top, the uptrend of the last inflationary period has continued for about 12 years (1968-1980) and the steam has run for 65% (top/bottom). The periods of consolidation (1951-1968, 1980-2002) have instead continued for about 20 years. During these phases, the index topped and bottomed roughly every 4/5 years.

Fireworks set before market extremes?

 How could this be applied to today markets? The last inflationary downtrend bottomed in 2002. The first up-leg topped for in 2008 (50%) and bottomed again during the same year. The actual movement started in 2008 and is still on (44%). So, the CRB index is reaching a crucial level in which time and space are beginning to converge. In the past, most extremes were characterized by high market volatility, while the market was designing new highs/lows before capitulating. Fireworks are often a sign of market extremes.

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CRB Index Patterns, 1950-2011

Major Tops
30 years
Bull Trends
Top to Bottom
17-21 years
Tops In
4-5 years
Bottoms In
4-5 years

1968–1980 11y
1951-1968 -17y
1980-2001 -22y

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