Chart Presentation: Confirmation

by KevinKlombies

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We are going to make the case for the Canadian dollar declining from close to parity with the U.S. dollar to perhaps as low as .8800 over the next month or two on page 3 today.

To start with, however, we are going to return to the topic of 'offsets'. At top right is a chart comparison from 1998 into 2002 between the Nasdaq Composite Index and the share price of Canada's Bank of Montreal (BMO).

We should note that the relationship between the Nasdaq and Canadian banks shown on this chart is not relevant today. There are times when strength in one market goes with weakness in another but from cycle to cycle the cast of characters tends to change. One example of this would be gold prices and the bond market. For years and years investors believed that gold price strength was a function of inflation and had to be associated with rapidly rising interest rates and tumbling bond prices. Today, of course, we know that gold prices can rise through both inflation and deflation.

In any event... from 1998 into 2000 the Nasdaq drove higher while BMO trended lower. The chart detail that we are looking at has to do with the position of both of these relative to their 200-day exponential moving average lines. In particular we are attempting to show that the trend changed in 2000 because BMO moved above its moving average line while the Nasdaq moved below its line.

The idea is that while the Nasdaq declined briefly below its 200-day m.a. line in 1998 and BMO rose above its line on occasion during 1999 the first time that both 'switched sides' was 2000. This marked the end of the trend favoring the Nasdaq at the expense of the Canadian banks.

Below is a comparative view of gold futures and the share price of Morgan Stanley (MS). We could have used Citigroup or even Goldman Sachs for this perspective but decided to stick with MS.

Our view is that gold and the banking stocks are opposing or offsetting trends in a manner similar to the Nasdaq and Canadian banks between 1998 and 2000. The positive trend for gold/negative trend for the financials dates back to 2007 so it has been running for a considerable length of time. The chart detail that we are currently fixating on has to do not only with the position of MS relative to its moving average line but also the prospect of confirmation later this year from gold prices moving back below the moving average line to confirm the end of one trend and the start of something new.

Equity/Bond Markets

Quickly... above we showed the Nasdaq and Bank of Montreal into 2000. The argument is that the trend changed in 2000 as a result of yield curve flattening. The chart at right of the SPX and spread between 10-year and 3-month TBill yields shows that when the yield spread approached '0' at the end of 2000's first quarter the stock market's advance stalled. The positive Nasdaq trend ended as the yield spread bottomed and then a positive Canadian bank trend started as the yield spread began to rise.

Quickly once again... the trend change that we expect to see once gold prices turn lower and the financials turn higher has to do with the relative strength between bond prices and the dollar. The chart below right shows that gold prices trend upwards on bond price strength and on dollar weakness so a rising spread between the TBonds and DXY goes with gold price strength. In other words... when the dollar starts to firm relative to bond prices we would look for downward pressure on gold prices.

Below is a comparison between the SPX, the price spread or difference between 30-year and 10-year (30- 10) Treasury futures, and the sum of the 30-year T-Bond futures added to the U.S. Dollar Index (DXY) futures.

The quick point is that as long as bond prices and the dollar remain 'flat'- as has been the case since the end of last August- the SPX is trending higher. The channel has support around 1270 and resistance way up around 1430.