Commodities have been fan favorites among investors this year, with gold and oil being two of the most popular trades on the market. And according to one technical analyst, the rebound in commodities could point to rising inflation.
Looking at longer term charts of the Consumer Price Index and the Commodity Research Bureau index, Piper Jaffray's Craig Johnson points to the significant relationship between the two.
"When you look at our longer-term chart going all the way back to the 1990s, you'll see that when we have a turn in the CRB index, usually you will see a turn in the CPI index six to 18 months later," he said Thursday on CNBC's "Trading Nation." "What I've started to notice ... over the last several months is a pretty meaningful turn in the CRB index."
This "turn" Johnson refers to is also notable given how many of the CRB's components have made it individually. The CRB is made up of 19 commodities components, 39 percent of which are energy commodities, 41 percent are agricultural and the rest are metals.
"It's not just oil, it's a broad-based turn in the entire CRB index," he added. "Couple that together with a 4.7 percent unemployment rate right now in the country and possible wage inflation coming, to me this really underpins the notion that perhaps we should be looking for inflation, not deflation, as we look forward to coming months and quarters."
The state of inflation is always significant to investors, given that it should affect allocation decisions. The simple assumption is that in times of rising inflation, stocks should tend to outperform bonds, since bonds offer fixed returns, while companies can often pass higher prices to their customers, meaning stock prices tend to rise along with inflation.
However, inflation expectations are even more salient now, as the Federal Reserve carefully considers its next move. Inflation has long run below the Fed's 2 percent target, but if it rises considerably above this target, the Fed would likely be much more willing to raise rates. This means that equities could also be hit hard by rising inflation expectations.
For these and other reasons, investors may not have many other places to go other than the commodities sector, points out Susquehanna head of derivative strategy Stacey Gilbert.
"You have a stock market that from a valuation perspective is incredibly rich. We have bonds that you know at some point the interest rates will get higher, so that [is] not really where investors want to position right now," she said. "It leaves a lot of the commodities space so that investors have something that they own, or that they feel like they own."
In her view, commodities are a smart pick for those who fear rising inflation.
