Chart Advisor: CRB or CPI?

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Wednesday, 12th April, 2023

1/ CRB or CPI?

2/ Soft Commodities Tell a Sticky Story

3/ Can Regional Banks Rebound?

4/ German Equities Reach New Highs

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1/ CRB or CPI?

Inflationary pressures eased last month, evidenced by today’s Consumer Price Index (CPI). The CPI rose 0.1% in March and was up 5% year-over-year, decelerating from 6% in February.

While fundamentals undoubtedly drive long-term trends, price movements often give valuable insight into the near-term trajectory.

Here is a dual-pane chart of the CRB Commodity Index and the annual percentage change in the CPI:

Source: All Star Charts, with data provided by Optuma

The two charts appear almost identical, as inflationary assets such as commodities are closely correlated with overall inflation.

When you consider that markets are forward looking, with price reflecting most if not all information available to investors, it’s difficult to prioritize lagging economic data.

As technical analysts, we prefer tracking inflation by studying commodities rather than the CPI report. They both peaked in June of last year and have been trending steadily lower since.

2/ Soft Commodities Tell a Sticky Story

Despite the lackluster price action from the CRB Commodity Index and signs of easing inflation, many commodity subgroups are presenting a contrary perspective.

Here is our custom soft commodity index, comprised of the New York “C” markets (cotton, coffee, and cocoa) as well as sugar futures:

Source: All Star Charts, with data provided by Optuma

These agricultural contracts represent one of the strongest areas of the commodity space over the trailing three months. Fresh six-month highs for this index suggest inflation might be stickier than expected.

Cocoa is on the verge of breaking out of a multi-year base. Sugar is rising, with the May contract up 12% over the trailing two weeks. Even cattle futures show no signs of slowing down as they steadily trend higher.

Certain commodities continue to climb despite weakness within the broader asset class. As long as that’s the case, the war on inflation could be far from over.

3/ Can Regional Banks Rebound?

With a handful of big banks kicking off earnings season on Friday, all eyes will be on the regional banks following last month’s string of bank failures.

Investors will be closely monitoring for any commentary or numbers that might provide insight into the state of lending at these financial institutions.

Here is a look at our custom Super Regional Bank Index, which features a collection of regional lenders including US Bancorp (USB), PNC Financial Services (PNC), and M&T Bank (MTB):

Source: All Star Charts, with data provided by Optuma

Like most regional banks, the index resolved lower from a distribution pattern in March with heavy downside follow-through. It has since rebounded off its 2018 lows to some extent. However, it is still coiling in what appears to be a bearish continuation pattern.

If these bank stocks and the continuation pattern in the broader index resolve lower in the direction of the underlying trend, it could spell trouble for the financial sector and equities more broadly.

4/ German Equities Reach New Highs

European equities continue to lead the way higher as more countries reach new highs.

One country index that stands out is the iShares MSCI Germany ETF (EWG), which is on the verge of resolving from a multi-month base as price presses against the upper bounds of its range.

Source: All Star Charts, with data provided by Optuma

Not only is price closing in on 52-week highs, but momentum has remained in a bullish regime, hitting overbought levels on multiple occasions since October.

Seeing this European bellwether break out could be constructive for the bulls.

Originally posted 12th April 2023

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