Chart Presentation: Trend Test

Below we show the Hang Seng Chinese Enterprise Index (we could have used the Hang Seng Index or something like the Shanghai Composite Index but this will likely suffice), the stock price of base metals miner Rio Tinto (RTP), and the sum of the Canadian (CAD) and Australian (AUD) dollar futures.

The argument begins with the assertion that Asian growth, the trend for base metals prices, and the trend for the currencies of major commodity producing countries such as Canada and Australia all tend to move in the same general direction.

A second argument would be that equities tend to lead economic activity so when a major equity market begins to weaken it suggests that the rate of growth of that country or region is starting to slow.

The charts show that the sum of the CAD and AUD has corrected down to the 200-day e.m.a. line on three occasions since last August and that each time this has happened the share price of Rio Tinto has been at a low somewhere close to its moving average line.

The charts also make the case that bottoms for the commodity currencies and bottoms for RTP go with a bottom for the Hang Seng Chinese Enterprise Index.

So… the markets are rapidly approaching yet another decision point. In August of 2007 as well as January and March of 2008 the commodity currencies reached bottom which led into very sharp recoveries- especially on a percentage basis- for RTP. To the extent that this has been the trend that simply will not die a repeat of recent history would suggest that RTP is close to making yet another pivot back to the upside.

On the other hand- and this is our basic view- if the commodity currencies fail to hold the moving average line on the fourth attempt to find support then this should indicate that the Asian growth/base metals trend has turned from relentlessly positive to at least potentially negative with the spectre of significant price erosion into the seasonally weak October/November time frame.

Through the past week or two we have attempted to show that most of the themes that have dominated the equity markets over the past couple of years have emerged some time around the first month of a new quarter. The point is that weak stocks and sectors can quite easily become markets leaders if the intermarket relationships that govern their trends also turn positive.

At right we show the stock price of Pfizer (PFE) along with the sum or combination of the U.S. 30-year T-Bond futures and the U.S. Dollar Index (DXY).

The argument is that a better dollar will act as a positive for PFE while rising interest rates and falling bond prices will serve as a negative. To really kick the pharma sector into gear the markets have to get to the point where the bond market AND the dollar begin to lift in tandem. More on this- in our usual roundabout way- on page 5.

This past Friday the U.S. dollar was better while the commodity currencies were somewhat weaker even as copper prices lifted as the equity markets swung back into the commodity cyclical names. In other words it was a mixed bag.

The chart below shows that the rise in copper futures prices went with strength in the Caterpillar/Pepsi (CAT/PEP) ratio. Obviously the ratio remains below the recent peak while the gains in copper simply lifted it above its 200-day e.m.a. line.

The key, we suspect, has to do with the chart at bottom right. We show India’s Bombay 200 Index and copper futures.

While a number of the major Chinese equity indices broke to new lows the Indian indices remain just above the bottom set in March when copper futures first touched 3.50. If indices like the Bombay 200 move to new lows then copper prices should break below 3.50 which will go some way towards swinging the equity markets theme back away from the cyclicals and towards the major consumers.