Wednesday, March 23, 2011

Fundamental Stock Market Indicator

We continue to closely monitor the relationship between the S&P 500 and our Fundamental Stock Market Indicator (FSMI). The two have been highly correlated over the past 10 years. They both remain on their solid upward trends of the past two years, though they’ve both stalled so far this month. That’s not surprising given recent events in the Middle East and Japan. The same can be said for the CRB raw industrials spot price index, which is one of the three components of our FSMI. Again, that’s not surprising under the circumstances.

The CRB raw industrials spot price index is our favorite indicator of global economic activity. It is highly correlated with measures of global industrial production and the volume of world exports. We like it because it includes 13 industrial materials prices and excludes energy and wood commodities. The index rose to a record high of 625.2 on March 4. It was down 3.1% from that high on March 16, and on March 22 was back to 620.6, only 0.7% below the peak. Our trusty CRB index includes the price of copper, which is our favorite of the 13 components in the CRB index. Copper hit a record high of $4.62 a pound on February 14. It is trading at $4.38 this morning. This year’s low was $4.13. We view $4 as key support. A drop below that, if confirmed by a break in the CRB index, would shake our confidence in the resilience of the global economy. 

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