We are going to show the same two charts that we included yesterday on this page but for different time frames. To get things started we have added a chart at right of the CRB Index and the share price of Coca Cola (KO) from 1980 into 1983.

The argument in yesterday’s issue was that the end of the rising trend for commodity prices should lead back into a rising trend for U.S. large cap growth names. A second point would be that recessions tend to mark the end of one trend and the start of another.

The chart immediately below shows that while the current situation may be different in many ways from 1981- 82 there are, in fact, a few similarities. When the CRB Index peaked in late 1980 the share price of KO did not turn higher immediately because… the economy was in recession and… the stock market’s trend was lower. In other words following the peak for commodity prices in 1980 there was no ‘clear winner’ in terms of themes or trends for well over a year.

Our view is that one of two things will likely happen. Either commodity prices reached a cycle peak in 2008 and we are now mired in a ‘dead zone’ similar to 1981- 82 that will lead to new highs for the sectors that have been under pressure since the late 1990’s or… the commodity markets will continue to rise until we tip over into a second recession and bear market that will ultimately lead to new highs for the consumer stocks.

Second chart below is a comparison between the yen/euro cross rate and the ratio of equities to commodities (S&P 500 Index divided by the CRB Index).

The point is that at the peak for names such as Coke, Wal Mart, General Electric, etc. in 1999- 2000 the ratio between equities and commodities reached a top. The frantic push by investors into commodities through 2007 into 2008 was typical- we suspect- of the tendency to pile onto a theme close to its conclusion. The chart shows that commodities were outperforming equities on a fairly consistent basis from 2000 into 2008 as the yen declined relative to the euro.

We have circled the argument on many occasions in the past but the idea is that yen strength against the euro is only a negative if commodities are still the dominant theme. When the theme changes- and it will one day- then yen strength will no longer be viewed as an indication that the financial world is heading into the abyss but will instead go with equity markets relative strength.



Equity/Bond Markets

July 1 (Bloomberg) — Declines of more than 20 percent in regional banks and home builders and the failure of transportation companies to erase their annual loss may be signs the rally in the Standard & Poor’s 500 Index is about to fizzle… Regional banks’ 51 percent plunge over 28 days starting Dec. 8 came a month before the S&P 500 began a 28 percent slump to a 12-year low of 676.53.

We have argued that the stock market will rally for two months from March into May before being pressured lower into early August. We included the Bloomberg comment above because it adds a bit of color to the argument.

The chart below shows the Ford/heating oil ratio along with the S&P 500 Index. Our view is that the SPX will remain flat to lower as long as this ratio is declining and… it has been under pressure since early May.

The same point holds true with the ratio between the semiconductors and crude oil (chart below). The ratio has been falling for the past two months as the SPX has held flat between roughly 900 and 950.

The chart below compares the ratio between Mitsubishi UFJ (MTU) and the gold etf (GLD) with the share prices of Winnebago (WGO) and Panasonic (PC). We could have used General Electric for this comparison as well.

We have argued (again and again) that the end of downward pressure on the financial markets will be marked by strength in the MTU/GLD ratio. The ratio bottomed in early March and peaked in early May so once again we are led to the conclusion that on any given day the stock market can rally or decline but until the ratios shown on this page turn upwards it makes sense to remain cautious.