Yesterday, I discussed how we use ratio charts to identify trends for both trading opportunities and information that we can use to make inferences about the stock market's next major move. Today, I want to look at an inter-market relationship between base metals and precious metals that may help provide information about where interest rates are headed.

To me, one of the more interesting aspects of this rally in stocks since the Dec. 24 lows is how little that risk-off assets like yen, Treasury bonds and gold have given back. Taking a simple approach and looking at their performance since the market topped on Oct. 3, the defensive posture of market participants looks pretty intact.

Chart showing the performance of the S&P 500, Japanese yen, 20-year Treasury bond and gold

One of the inter-market relationship we're watching for clues into the trend in Treasury bonds is the ratio of base metals to precious metals, or the Invesco DB Base Metals Fund (DBB) vs. the Invesco DB Precious Metals Fund (DBP).

While it's unclear over the past decade whether one consistently leads the other, what we can see is that they often share major inflection points, and divergences in their performance cannot be sustained for extended periods of time before the relationship snaps back into place. So when there are significant divergences, we pay attention.

Chart showing the performance of the Invesco DB Base Metals Fund (DBB) vs. the Invesco DB Precious Metals Fund (DBP).

In late October, when the 10-Year yield made another attempt at exceeding 3%, the base metals/precious metals ratio was making a lower high and rolling over. This added to the lack of confirmation we were seeing from other rate-sensitive sectors of the stock market, like regional Banks and REITs. While it took some time, the 10-Year did eventually catch down, and they're back to trading in tandem.

Until we start to see a divergence in their price action, this is simply another data point that continues to suggest that the Treasury bond rally and precious metal outperformance may have more legs to the upside. And if Treasuries and precious metals are rallying, it's unlikely that we're in an environment where stocks are making a sustained move to the upside.

We're open minded and will analyze the data and weigh the evidence as it comes in, but for now, it appears that the best-case scenario for stocks would be some sideways consolidation to work through all of the overhead supply through time, rather than through a further decline in prices.

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