Chart Presentation: Summary

We are going to attempt to quickly summarize one of the points that we have been working on of late. To start with we show 3-month euribor futures below.

European short-terminterest ratesbegan to rise in late 2005 as euribor prices turned lower.

Below we show Citigroup (C) and the ratio between Japan’s Mitsubishi UFJ (MTU) and the gold etf (GLD).

The negative or bearish trend for thefinancials began in late 2005 as euribor prices began to decline. This went with the start of the falling trend for the ratio between MTU and gold prices. Much of the drama surrounding the U.S. banks over the past 12 months comes from the way that they pushed higher from 2005 into 2007. The chart suggests that Citigroup’s share price had a long way to fall in order to catch up with the negative trend.

Below is a chart comparison between the euro futures and the ratio between French (CAC 40 Indice) and U.S. (S&P 500 Index) equities.

The rising trend for European yields has helped push the euro higher and as the euro has risen the Frenchstock markethas weakened relative to the U.S. market. If the euro were to continue to rise then it is likely that the European equity markets will weaken to the point where euribor prices start to rise which will, in turn, lead to a weaker euro and stronger dollar.

Today is, of course, July 14th. We mention this not because the date itself is important but because it marks some level of progress through the first month of the third quarter of this year.

Below we have included three charts. The top chart shows crude oil futures through the low made in January of 2007, the second runs through the bottom fornatural gasfutures in January of 2008, while the third features the 1987 stock market ‘crash’.

What do all three of these charts have in common? A sharp decline through the first three weeks of a new quarter followed by either a rally or, in the case of 1987, a recovery of sorts.

Around this time every three months or so we argue that when a quarter starts off strong it tends to peak around the last week of the first month of a quarter and then turn lower. On the other hand when a quarter starts off by driving to the down side the lows are often made around the start of the fourth week of the quarter followed by a recovery rally.

The point is that crude oil prices were sharply lower through the first half of January in 2007 before pivoting back to the upside. A year later natural gas prices were very weak into mid-January before turning back to the upside.

One of the most unusual examples of this tendency would have to be the 1987 stock market ‘crash’. The SPX entered the month of October very close to the August highs and then promptly collapsed into an accelerating decline that suggested to many that a depression was on the way.

The chart below right shows the ratio between the stock prices of Caterpillar (CAT) and Coca Cola (KO). We use to CAT/KO ratio to help measure the relative strength of ‘cyclical’ versus ‘consumer’.

The CAT/KO ratio peaked in July of 2007 and then bottomed in January of 2008. Fair enough.

More specifically the ratio peaked in the first month of a new quarter in July and then bottomed in the first month of a new quarter in January. Even more specifically… the peak was hit on July 17th and the bottom was touched on January 17th.

The reason we started off this page by noting that today was July 14th was that it is time to start looking for trend changes or pivots. Over the next week or two most of the major U.S. public companies will report quarterly earnings and the markets will then stop fixating on what has already happened and start focusing on the next three months. Some companies will most surely disappoint but many will report earnings and guidance ahead of expectations and even a few that will surprise the markets so substantially that theirstocks will ‘gap’ to the upside.

Our sense is that this would be a reasonable time to ‘chase gaps’. If the difference between the high share price the day before the gap and the low share price on the day of the gap is more than 10% then quite often the share price will continue to rise for another quarter or two. We have never done a study on this but it has been our observation that gaps of 10% or more in reaction to surprisingly good news tend to lead to much higher share prices over the ensuing months.