V.6:5 (166-169): Spread trading the CRB Index by John J. Murphy and David J. Hirschfeld

V.6:5 (166-169): Spread trading the CRB Index by John J. Murphy and David J. Hirschfeld
Item# \V06\C05\SPREADT.PDF
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Spread trading the CRB Index by John J. Murphy and David J. Hirschfeld

This article really has two aspects. The first is to introduce the concept of relative strength analysis to commodity markets utilizing CRB Index futures. The second aspect is to show how relative strength (or ratio) analysis can be used as a stepping stone for intermarket spread trading between individual commodity markets and CRB Index futures. Relative strength analysis used in this context refers to the comparison of two different entities, usually through ratio analysis, and is not to be confused with the Relative Strength Index developed by J. Welles Wilder.

Relative strength analysis

Relative strength analysis is widely used in stock market investing. An individual common stock or an industry group is compared to some objective benchmark, most commonly Standard & Poor's 500 Index. The stock or industry group is divided by the S&P Index and the resulting ratio is plotted daily on a price chart to compare the stock or group to the broader market.

A rising relative strength (RS) line indicates the stock or industry group is outperforming the broader market. A falling RS line indicates a weaker performance relative to the market. Stock analysts and portfolio managers use this technique to monitor the rotational nature of the stock market and to ensure that money is flowing into the stronger market sectors and stocks.

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