Do Markets in General Make Sense?

• The classic relationship between markets sectors seems to be as irrelevant as technical analysis in general these days. 

• If the key market is the US dollar, what does it say when the Index fell to a new 3-year low last month?

• Generally speaking, there has been a flow of long-term investment money out of equities and into short-term Treasuries based on all the certain uncertainty created. 

I recently wrote a piece asking the question if the WTI crude oil market makes sense, with the conclusion a resounding “Maybe, maybe not”. Helpful, right? But that’s the world we live in today. With that thought in mind, I want to expand the discussion to markets in general, most notably the sectors discussed in John J. Murphy’s 1991 book, “Intermarket Technical Analysis”. I like Mr. Murphy’s book as it takes apart what the various market sectors were doing ahead of Black Monday 1987. You might recall this is the event that brought me into this industry and set the stage for my Market Rule #5: It’s the what, not the why.

If we turn to Chapter 13 in the book – not because my lucky number is 13 but because it is the chapter titled “Intermarket Analysis and the Business Cycle – Mr. Murphy lays out how the key market sectors related to each other over at the time: 

• Stage 1: Bonds turn up (stocks and commodities falling)
• Stage 2: Stocks turn up (bonds rising, commodities falling)
• Stage 3: Commodities turn up (all three markets rising)
• Stage 4: Bonds turn down (stocks and commodities rising)
• Stage 5: Stocks turn down (bonds dropping, commodities rising)
• Stage 6: Commodities turn down (all three markets dropping)

Let me take a moment to say I have had two of Mr. Murphy’s books on my shelf throughout my career in analysis, this one and the one I cite as a textbook, “Technical Analysis of the Futures Market” (1986 edition). However, as I discussed with Barchart’s Senior Market Strategist John Rowland back in February, I think technical analysis has gone the way of newspapers – largely irrelevant in this day and age of algorithm-driven trade. I’ll hedge that statement by saying I still study trends, or price direction over time, based on the application of Newton’s First Law of Motion to markets: A trending market will stay in that trend until acted upon by an outside force, with that outside force usually large investment money. It’s all the patterns, indicators, trend lines, etc., that I have no use for. As for the classic business cycle, this too has followed the Daily Tribune down the path to obscurity. Why? Chaos Theory. When global markets hinge on what one person says, at any time, there is no absolute intermarket connection to track. 

Which brings us to the main topic of today’s discussion: Do markets in general make sense in early May 2025?

• The long-term trend of US 10-year T-note futures (ZNM25) is sideways on its continuous monthly chart, indicating traders hold an uncertain outlook
  • This fits with US Fed Chairman Powell’s comments at the end of the May FOMC meeting, “It’s really not at all clear what it is we should do. There’s so much uncertainty.”^[i] (This, of course, is tied to US president’s constant ebb and flow of tariffs and trade wars.
• Also due to the US president’s mercurial nature, US stock indexes plunged in early April, the S&P 500 ($INX) falling more than 20% from its February high, moving it into bearish territory. However, the rest of the month saw the Index rally, a move that has carried over into early May.
• If we look at the 3 Kings of Commodities as proxies for the complex in general we see:
  • The June gold futures contract (GCM25) hit a high of $3,509.90 on April 22 before falling to a low of $3,209.40 on May 1. The contract then rallied back to a high of $3,448.20 this past Wednesday (May 7). As I told Kitco News Friday morning (May 9), “If I had to pin one analytical thought to the bulletin board it would be “Precious Metals Should Go Up”, with “Should” underlined because there are no absolutes in markets” (what I like to call the Vodka Vacuity).
  • Spot-month WTI crude oil (CLM25) fell to a low $55.30 overnight through Monday morning, despite the fact the market’s forward curve remains in backwardation. The latter tells us domestic crude oil supply and demand remains bullish. Meanwhile, noncommercial traders continue to hold a net-long futures position as well. Hence the question, “Does the WTI Crude Oil Market Make Sense” from earlier this week.
  • The intrinsic value of the corn market, the National Corn Index ($CNCI), bringing to mind the Law of Supply and Demand from Econ 101) looks to be in a long-term sideways trend similar to what was seen between 2014 and 2020.
• For good measure I’ll throw in the US dollar index ($DXY). Last month saw the greenback fall to 97.92, its weakest mark since March 2022. Since then, though, the Index has strengthened to 100.86 through early May. Is a stronger dollar hinting at a possible rate hike, or simply reacting to higher short-term rates due to the uncertainty mentioned by Chairman Powell? Time will tell, but again, the path ahead is not clear. 

Where does all this leave me as a long-term investment analyst: 

• You’ll recall my key market is Corn. For now, I’ll continue to use the futures markets high implied volatility in the December 2025 contract combined with the long-term sideways trend with the long-term buy from August 2024 rolled to the December 2026 issue. It sounds more complicated than it actually is.
• Investments in US equities have been rolled into short-term Treasuries based on the establishment of a long-term downtrend by the S&P 500 during March.
• Long precious metals, either gold or silver, as a hedge against other investment sectors.

The bottom line is I agree with both Chairman Powell and Warren Buffett: The only thing certain about the current situation is uncertainty. Do markets make sense? My Blink reaction is both yes and no given the circumstances.

^[i] From a recent piece on Salon.com: (LINK)

On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.