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Chart 12. Arrows show KST peaks.See Chart 12A for more detail.

Chart 12A. Arrows show KST peaks.

Because the Consumer Price Index (CPI) is less volatile than commodity prices CPI, adjusted equity prices have been in an uptrend since 2002 (Chart 12), even though the secular trend break and the consistently accurate sell signals from peaking KST of this relationship are still very apparent. If you look at the historical chart that covers the period prior to the 1960’s, you will see that apart from the 1924 signal, reversals in this indicator from above zero have consistently forecasted primary bear markets on a very timely basis, with the most recent signal developing in April 2004. So based on past relationships, we should expect a stock market peak at any time.

Stocks vs. Gold

Trend reversals in the Stock/Gold Ratio also warn of an impending U-turn in equities. These signals are not triggered very often, but when they are, it’s a good idea to pay attention. Gold prices typically lead commodities at both tops and bottoms, so it’s not surprising this Ratio is an excellent forecasting tool for equities.

Chart 13 shows the secular trendlines for both the ratio and the S&P were violated a few years ago and it’s possible to construct trendlines for both series on Chart 14. When they are jointly violated, a reliable trend reversal signal is given.

The ratio is already at a new cyclical and secular low, which is a very ominous sign from a long-term perspective. Confirmation of this ratio break will come when the S&P Composite itself violates its (end-of-month) up trendline at 1260.

Chart 13.