We have a reasonable handle on where the markets are in terms of the cycle’s progression so as long as prices resolve in an expected manner we might as well kick back and enjoy the ride. Of course there are far too many moving pieces to actually have everything figured out but we remain somewhat comfortable with our macro view.

From cycle to cycle different stocks and sectors will lead, follow, pivot, and outperform. A trend dominated by rising energy prices will produce one outcome while a trend driven by tech will provide another. It is difficult to argue with real conviction that just because something happened in the past it will happen in the future but… we sleep better when we are working with a mental picture or road map.

Below is a chart from 2003 comparing the U.S. 30-year T-Bond futures and the share price of biotech giant Amgen (AMGN).

Long-term interest rates peaked at the start of 2000 with the Fed cutting the funds rate for the first time a year later in January of 2001. The cyclical recovery began around the end of 2001 as commodity prices started to rise bolstered in 2002 by U.S. dollar weakness. Amgen made its low in July of 2002 about a quarter ahead of the S&P 500 Index. The stock market made a second bottom in the spring of 2003 and then reached what we call the ‘cyclical pivot’ close to the end of that year’s second quarter.

Amgen’s share price rose to a peak just after the final highs were set for the long end of the U.S. Treasury market. The trend change (from higher to lower for AMGN) was made in July of 2003 at virtually the exact point in time that the TBond futures crossed down through the 200-day e.m.a. line.

Amgen has been pushing steadily higher for the past 13 months while the TBond futures remain somewhat north of the 200-day moving average line. Our view is that we are approaching the ‘cyclical pivot’ although we have no clear sense at this time when this event will take place although our sense is that it may will occur one of these Thursdays following a surprisingly large decline in U.S. weekly job claims. For now Amgen continues to find support at its rising 50-day e.m.a. line while the TBonds have done an admirable job of ignoring the Fed’s efforts at shock and awe by holding the 200-day line.

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For the U.S. dollar banks are ‘good’ while energy is ‘bad’. Or something like that.

Below is a chart comparison between 3-month U.S. TBill yields and the ratio between the Bank Index (BKX) and the S&P 500 Index (SPX).

TBill yields are currently close to .1% and we suspect that they will have to rise above .25% before the Fed becomes inclined to raise the funds rate. The argument is that while the Fed would like to hold the funds rate flat until employment levels decline or inflation rises the reality (in our view) is that the markets will tell the Fed when it is time get off the pot. Once long-term yields have risen far enough or long enough so that TBill yields are dragged above .25% it will be time for the initial round of credit tightening.

The chart suggests that upward pressure on TBill yields is related to the bank shares outperforming the broad market.

Below is a chart of the ratio between the Natural Gas Index (XNG) and the SPX.

The shale gas and oil story has been dominated the markets for the past decade. This is, in other words, not a new trend. What intrigues us about the XNG/SPX ratio is the way it has declined since the autumn of 2011.

Below is our attempt to link the banks to the fracking trend through the Canadian dollar. We will continue with this on the following page.

The XNG/SPX ratio represents the same trend as the Cdn dollar. The XNG tends to trade tick for tick with the loonie so the idea is that U.S. dollar weakness relative to the commodity currencies is, in large part, an extension of the strength of the shale oil and gas theme.

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