Every time we read or hear the financial news we are amazed that the stock market hasn't fallen even further. Surely the bears have to be right given the state of global growth and the apparent certainty of a Greek debt default. Surely the smart money still heading for the exits has to be correct. And yet...
We do our best to avoid reading and hearing the financial news as much as possible because, in general, it is sort of depressing. In a bull market it serves to remind us that we have not favored the hottest sectors while bearish trends are depressing enough without the constant reminder of how things can only get worse.
We avoid the reality stars of the major financial networks and spend our time listening to the markets as we dig for cracks, divergences, and similarities to past cycles.
First is a chart comparison between 10-year Treasury yields and the ratio between the share price of Coca Cola and the S&P 500 Index from April of 2007 through April of 2009.
Next is featured the same comparison starting in January of 2010.
The argument is that the correction that swept through the markets during the second half of 2008 began in earnest at the end of the second quarter in 2007 when bond yields peaked and turned lower. The falling trend for bond yields led to a rising trend for Coke relative to the broad U.S. stock market. In other words as 10-year yields moved lower the ratio between KO and the SPX moved higher.
The correction began to draw to a close in December of 2008 as 10-year yields started to recover.
When we compare the current trend to that of 2007- 08 we find that the cycle started to erode at the end of the first quarter of 2010. In terms of ‘time' the charts suggest that the current month lines up almost perfectly with December of 2008. The argument would then be that even as conditions seem to be worsening on a daily basis there is a reasonable chance that we are already into the early stages of a recovery with the next leg coming from an upturn in long-term Treasury yields.
Equity/Bond Markets
The chart below compares the ratio of gold to the CRB Index with the ratio of the S&P 500 Index divided by the U.S. 30-year T-Bond futures and the Bank Index .
The idea here is that the markets are making some kind of stand near current levels. The price of gold has stopped rising relative to general commodity prices, the ratio between equities and bonds is holding above the recent lows and the Bank Index is making a potential bottom below the 40 level.
Further below we feature the gold/CRB Index ratio once again along with the U.S. 30-year T-Bond futures.
The gold/CRB Index ratio is almost identical to the trend for the TBonds. Notice that the moving average lines for both markets ‘crossed' to the down side in December last year and then back to the upside around the end of May.
The argument is that if the gold/CRB Index ratio stops making new highs then the TBonds should be close to a top as well.
Another spin on the premise is shown below using the TBond futures and the ratio between gold and crude oil futures.
The support line for the gold/crude oil ratio cuts through around 20:1 and this appears to line up with a price for the TBond futures close to 135. If we continue to get relative weakness in gold prices compared to crude oil it is possible that the TBonds are making a price peak this month. This fits in fairly nicely with the first page argument that yields could bottom this month in a manner similar to December of 2008.
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