Chart Presentation: Crossroads

We start things off today with a comparison between the sum of copper futures (in cents) and crude oil futures (in dollars and multiplied by three) and the sum of the U.S. 30-year T-Bond futures and the U.S. Dollar Index (DXY).

One can argue that the long end of the Treasury market is getting a ‘bid’ out of the problems associated with Fannie Mae and Freddie Macbut we will counter and suggest that the markets are merely squeezing long-term yields down towards the 2% Fed funds rate.

In any event both the dollar and the bond market were marginally stronger yesterday and the intermarket argument is that when the sum of the two is rising there is downward pressure on energy and metals prices.

The down trend for bonds plus the dollar began in late 2001 and as recently as this past January the trend line that defines the top of the decline was tested. The charts show that when the sum of the TBonds plus the DXY rose to a peak in January this went with a bottom for the combination of copper and crude oil.

The big question today is whether the strength in bonds and the dollar has reached another peak similar to January or whether, as we have argued, the trend is finally set to change as the TBonds and DXY break up through the resistance line.

The chart below right compares the stock price of natural gas producer Chesapeake (CHK) and the ratio between the share prices of Caterpillar (CAT) and Coca Cola (KO).

In January as the sum of the TBonds and DXY spiked to a peak we can see that CHK was at a bottom around its 200-day e.m.a. line while the CAT/KO ratio had declined to a low.

If mid-August is actually a replay of mid-January then the bond market and dollar should turn lower while energy and metals prices swing higher. This would go with yet another bout of strength in the oil and gas sector and relative strength for cyclical CAT over consumer defensive KO. Our view, as always, is that the major trend is set to change as the dollar and bond market rise even as commodity prices decline. The problem is that the markets are at a cross roads and for the past 7 1/2 years all outcomes have favored the commodities sector.