There are four broad asset classes viz. commodities, currency, equity and bonds. Though there are intermarket linkages all over, quantifying money flow from one asset to the other is not easy. There are a few hurdles. First, assets are denominated in various different currencies. Second, assets have different denominations, some like gold are trading at 1200 dollars and Oil near 70 dollars. Third, there are many biases against looking at cross assets as part of the same strategy. There is geographical bias, information bias (asset knowledge) and other tradability issues (different markets).
Assuming one could overcome the bias issue, (the hardest of the hurdles) a dollar index benchmarking and indexing global assets to a similar denomination could help ranking performance. This is what we did. We took 54 assets from metals, energy, agro, bonds, currency, equity, and benchmarked all of them against the dollar index. The integrated database was ranked (Fig 4.) on price performance for quarterly trends. We added three India specific assets, the Sensex, INR Fixed Income Fund, and INR (Indian Rupee).
Indian Rupee was ranked at the 45 place while Sensex was at number 19. Higher ranking showing higher relative performance and vice versa. A closer look and one could comprehend the classic Rupee (currency) vs. Sensex (equity) intermarket relationship. A falling (strengthening) currency compared to a strong equity composite.
There is a limit to relative performance. Even if this means a pause in the secular trend. The ranking process discussed here is banded between 1 and 55
(best and worst). This means there is an extent to which Indian Sensex (top 30 index) could relatively outperform the other 55 global assets.
Similarly there is a limit to which Indian rupee could fall (strengthen). This means that at a certain stage in the ranking process the rupee should bottom and reverse accompanied by Sensex that should top or pause. This ranking process could be confirmed with individual charts.
We carried both INR and Sensex together. While INR is making a potential inverse head and shoulder, Sensex is heading towards previous high. This is a potential non confirmation (Fig 1). We also have an Elliott corrective (a-b-c) formation on INR suggesting Intermediate trend for the Rupee could be up. Fig3. we have carried Sensex with an inverted INR. The potential non confirmation case is even clear here between highs. A push up above 47 on INR would confirm the preferred view. After which, INR should start increasing in ranking while Sensex should fall in ranking (underperform) the global assets group.
Ranking process or relative ranking like the intermarket process works cyclically. Equity leads the underlying commodity at reversals. There is a time when gold outperforms Dow, Oil underperforms gold and bonds do better than equity. The current rankings suggest a reversal in Agricultural equity Fund vs. Agro commodities Index (AIGA). The former is suggesting an outperformance against the latter. Relative ranking is a dynamic process and could be illustrated like an oscillator (Fig 5, 6). Ranking processes also suggests gold underperformance against Oil. Over the coming weeks we will delve on intermarket relationships, charts and relative rankings to understand where the markets are headed.