EQUITIES.

(CHART

COURTESY

BUSINESS

CONDITIONS DIGEST.)

Stock Market Groups

Its often been said that the stock market is a market of stocks. It could also be

said that the stock market is a market of stock groups. Although its true that most

individual stocks and most stock groups rise and fall with the general market, they

may not do so at the same speed or at exactly the same time. Some stock groups will

rise faster than others in a bull market, and some will fall faster than others in a bear

market. Some will tend to lead the general market at tops and bottoms and others

will tend to lag. In addition, not all of these groups react to economic news in exactly

the same way.

Many stocks groups are tied to specific commodity markets and tend to rise and

fall with that commodity. Two obvious examples that will be examined in this chap-

ter are the gold mining and energy stocks. Other examples would include copper,

aluminum, and silver mining shares. These commodity stocks tend to benefit when

commodity prices are rising and inflation pressures are building. On the other side

of the coin are interest-sensitive stocks that are hurt when inflation and interest rates

are rising. Bank stocks are an example of a group of stocks that benefit from declin-

ing interest rates and that are hurt when interest rates are rising. In this chapter,

the focus will be on savings and loan stocks and money center banks. Other exam-

ples include regional banks, financial services, insurance, real estate, and securities

brokerage stocks.

The stock market will be divided into those stocks that benefit from rising infla-

tion and rising interest rates and those that are hurt by such a scenario. The working

premise is relatively simple. In a climate of rising commodity prices and rising in-

terest rates, inflation stocks (such as precious metals, energy, copper, food, and steel)

should do better than financially-oriented stocks such as banks, life insurance com-

149

150 STOCK MARKET GROUPS

usually lead the price of gold. Gold traders, therefore, should keep an eye on what

gold raining shares are doing for early warnings as to the direction the gold market

might be taking. Stock traders who are considering the purchase or sale of gold mining

shares should also monitor the price of gold.

The second message is that intermarket analysis of stock groups yields important

clues as to where stock investors might want to be focusing their attention and cap-

ital. If inflation pressures are building (commodity prices are rising relative to bond

prices), emphasis should be placed on inflation stocks. If bond prices are strength-

ening relative to commodity prices (a climate of falling interest rates and declining

inflation), emphasis should be placed on interest-sensitive stocks.

THE CRB INDEX VERSUS BONDS

In Chapter 3, the commodity/bond relationship was identified as the most important

in intermarket analysis. The fulcrum effect of that relationship tells which way infla-

tion and interest rates are trending. One way to study this relationship of commodities

to bonds is to plot a relative strength ratio of the Commodity Research Bureau Price

Index over Treasury bond prices. If the CRB Index is rising relative to bond prices,

this means inflation pressures are building and higher interest rates will be the likely

result, providing a negative climate for the stock market. If the CRB/bond relation-

ship is weakening, this would suggest declining inflation and falling interest rates, a

climate beneficial to stock prices.

Now this same idea will be used in the group analysis. However, this time that

relationship will help determine whether to commit funds to inflation or interest-

sensitive stocks. Theres another bonus involved in this type of analysis and that is

the tendency for interest-sensitive stocks to lead other stocks.

In Chapter 4, the ability of bonds to lead the stock market was discussed at some

length. Rising bond prices are positive for stocks, whereas falling bonds are usually

The intermarket analysis of stock groups will begin with the gold market. This is a

logical point to start because of the key role played by the gold market in intermarket

151

gold mining shares. A technical analysis of one without the other is unwise and

unnecessary. The accompanying charts show why.

One of the key premises of intermarket analysis is the need to look to related

markets for clues. Nowhere is that more evident than in the relationship between the

price of gold itself and gold mining shares. As a rule, they both trend in the same di-

rection. When they begin to diverge from one another, an early warning is being given