Aside from the fact that the equity and commodity markets are substantially higher than they were at the end of last week... we really don't have too much more to add. Nothing new at least.
The arguments have been that the markets tested the point of maximum stress around a week ago... and held. With a new quarter beginning one of two things had to happen. Either the news was going to have get appreciably worse to keep the crisis trend intact or... prices were going to rebound. Fair enough.
Below is a chart comparison between the ratio of the S&P 500 Index to the U.S. 30-year T-Bond futures, copper futures, and the price spread or difference between the 30-year and 10-year Treasury futures.
The 30- 10 spread is one of the ways that we follow the trend for the bond market. The spread line rises when bond prices are moving higher and declines when bond prices are falling.
The first point is that the spread reached the exact high set at the end of 2008 at the low point for copper futures.
The second point is that in recent years asset price corrections have begun after the spread has declined back below the ‘0' line and then started to rise.
Assuming that history is going to be kind enough to repeat... the next bearish asset price trend is some distance off. The 30-10 spread has to work all the way back down below ‘0' before we are once again at risk for another crisis trend.
Equity/Bond Markets
One of the challenges involved in attempting to decipher our work comes from the fact that we are generally looking far out into the future. As soon as a trend begins we start to focus on the next trend so quite often we are concentrating on events that may or may not happen 6 to 12 months out in time. Such is the case with our U.S. dollar view.
The argument is that the cyclical trend follows a similar path from decade to decade. The term ‘cyclical trend' includes all of the sectors that are economically sensitive and while most will tend to trend in the same direction at the same time there will be periods of divergence.
What makes this tricky is that different sectors show weakness each decade. This little twist tends to hide the repetitive nature of the trend.
Below is our chart of the CRB Index and TBond futures through the 1981- 82 time frame. The bond market bottomed in price in 1981 while equities and commodities bottomed close to a year later in 1982.
Next we show the Nikkei 225 Index and ratio between Citigroup and Wells Fargo from 1991- 92. The laggard banks bottomed on a relative basis in the autumn of 1991 while the Nikkei made a low a year later in 1992.
Last is the S&P 500 index and CRB Index through 2001- 02. The commodity markets bottomed in 2001 while large cap U.S. equities bottomed a year later in 2002.
The point is that the dominant theme from the previous decade did not make a low until the second half of the ‘2' year. While it is always possible that we could be wrong on this our assumption is that if the last dominant theme was commodity/small cap/foreign then these will be the sectors that wash out next autumn. For that to happen the dollar will have to eventually swing back to the upside but... for now this is an argument that be best set aside until we get into the first quarter of next year.
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