Over the past few years, the chart of the commodities complex looks to have built a fairly solid base. The pattern of lower lows and lower highs that began three years ago has now given way to a new pattern of higher lows and higher highs over the past nine months or so, essentially the definition of an uptrend.
This bottoming pattern in commodities coincides with a larger topping pattern in the dollar index. And, because it is so overvalued today, the recent weakness in the dollar likely represents just the beginning of a long-term downtrend.
These bull and bear phases in the dollar are typically the defining factors for bear and bull phases in commodities. Thus a major dollar bear market is just the catalyst needed for a new commodities bull market in the years ahead.
Due to their high price correlation, rising commodities prices, however, are not something bond bulls would like to see right now. In the short run, the falling dollar could push commodities prices higher, putting upside pressure on interest rates.
This validates the bullish technical setup in the 10-year treasury yield. Just after the presidential election, it broke out of a pennant pattern formed over the past two years. Since then, it has fallen back to test its breakout and appears to have formed a head and shoulders bottom pattern over the past couple of months. Both technical patterns point to a likely test of multi-year highs ahead.
Finally, a renewed surge in interest rates, driven by a falling dollar and rising commodities prices, would not be welcome news to the stock market, either. Given where consumer confidence currently sits, the ratio of stocks-to-commodities already looks out of touch. Stagflation will likely only worsen consumer confidence, making a sharp move in this ratio to the downside that much more likely.
