Direct Answer
The level of a broad commodity index divided by the level of an equity index. It compares the relative performance of raw materials and stocks and is used as a cross-asset gauge of growth and inflation cycles. A rising ratio means commodities are outperforming stocks, as in inflationary or supply-constrained periods; a falling ratio means stocks are outperforming.
Commodity/Equity Ratio: Formula, Meaning, Signals, Examples and How to Use It
How Is Commodity/Equity Ratio Calculated?
The level of a broad commodity index divided by the level of an equity index. It compares the relative performance of raw materials and stocks and is used as a cross-asset gauge of growth and inflation cycles.
Formula: Commodity/equity ratio = commodity index level / equity index level
Inputs:
- Broad commodity index level or price
- Equity index level
- Same dates and currency
Worked example. A commodity index at 105 and an equity index at 4,200 give a ratio of 0.0250. The inputs are illustrative numbers, not market data.
Reading it. A rising ratio means commodities are outperforming stocks, as in inflationary or supply-constrained periods; a falling ratio means stocks are outperforming. The trend and turning points matter more than the level.
Limits. The level depends entirely on index choice and base dates, so only changes over time are meaningful. Commodity futures indexes include roll yield, which can differ from spot price moves.
What is Commodity/Equity Ratio?
The level of a broad commodity index divided by the level of an equity index. It compares the relative performance of raw materials and stocks and is used as a cross-asset gauge of growth and inflation cycles.
How to use Commodity/Equity Ratio
A rising ratio means commodities are outperforming stocks, as in inflationary or supply-constrained periods; a falling ratio means stocks are outperforming. The trend and turning points matter more than the level. A reading alone is never a buy or sell signal; it needs context from price structure, volume, volatility and the broader market regime.
Strengths
- Dividing one index by another yields a relative level, so a rising ratio means commodities outperformed regardless of the market's overall direction.
- Rebasing the ratio to 100 cancels the base-year differences, so the starting point can be set to any date of interest.
- Reproducible when the formula and data convention are fixed.
Weaknesses and limitations
- Several broad commodity indexes carry a large energy weight, so the ratio can act as an oil-versus-stocks measure.
- A stock index with a large share of commodity producers moves partly with the numerator, which blurs the comparison between the two.
- Correlated indicators can create false confidence by repeating the same underlying information.
Editorial and risk note
This page is educational content, not individualized investment advice. It should not imply guaranteed prediction, accuracy or outperformance.
Frequently Asked Questions
Is Commodity/Equity Ratio a buy or sell signal?
No. A rising ratio means commodities are outperforming stocks, as in inflationary or supply-constrained periods; a falling ratio means stocks are outperforming. The level depends entirely on index choice and base dates, so only changes over time are meaningful. A trade built on it still needs a trigger, an invalidation rule, a position size and realistic execution assumptions.
What is the best setting for Commodity/Equity Ratio?
Commodity/Equity Ratio is computed from broad commodity index level or price; equity index level; same dates and currency, so the choices that matter are the data convention and the window it is read over. Test those across instruments, regimes and out-of-sample periods instead of fitting one historical winner.
Can Commodity/Equity Ratio be used by itself?
The level depends entirely on index choice and base dates, so only changes over time are meaningful. Commodity futures indexes include roll yield, which can differ from spot price moves. For that reason it is read next to measures of direction, participation, valuation, liquidity and risk, not alone.
Does Commodity/Equity Ratio work on every timeframe?
The calculation (Commodity/equity ratio = commodity index level / equity index level) can be run on any bar size, but behavior is not portable: a reading on a five-minute chart describes a very different market window from the same reading on a daily chart. Validate the exact timeframe before relying on it.
Why does Commodity/Equity Ratio give false signals?
Several broad commodity indexes carry a large energy weight, so the ratio can act as an oil-versus-stocks measure. A stock index with a large share of commodity producers moves partly with the numerator, which blurs the comparison between the two. Lag, noise and regime changes add to this, because market participants react to new information after the reading is calculated.
How should Commodity/Equity Ratio be backtested?
Rebuild Commodity/Equity Ratio from broad commodity index level or price using point-in-time data, write the rules before testing, include delisted securities where relevant, model realistic fills and costs, reserve a validation sample and compare with a simpler baseline.