We are going to start things off today with a relatively simple chart comparison. We show three charts of the S&P 500 Index (SPX) and the product of the CRB Index (commodity prices) times the U.S. 30-year T-Bond futures (bond prices). The chartbelow is from 1982, the one below runs through the stock market’s consolidation in 1994, and the chart directly below is from the present time period.

There are times when the equity markets lock in quite closely with the combination of commodity and bond prices and this feels like one of those times. The argument is that the S&P 500 Index will remain in a flat to lower trend until either bond prices or commodity price rise far enough to push the product of the two back up through the 200-day e.m.a. line.

Given that we are negative on the bond market the ‘wild card’ would be the commodity markets. Our ongoing argument has been that the commodity markets would remain under pressure through the first half of the year so it is still our conviction that a sustained recovery for equity prices is still a few months off.




Equity/Bond Markets

We are going to launch into a new thesis today based in large part on an argument that we have made in different ways and at different times over much of the past decade.

The ‘decade theme’ is based on the idea that the cyclical trend keeps repeating. In 1980 commodity prices reached a peak, in 1990 Asian growth topped out, and then in 2000 the broad U.S. large cap tech and telecom theme reached a top.

We are not going to get into a detailed description of how this has worked but the idea is that the markets went commodity then Asian then tech and then back to commodities. If this pattern repeats the next theme would be Asian growth.

Belowwe compare the ratio between crude oil and the CRB Index with the ratio between the Nikkei 225 Index and the S&P 500 Index. The twist is that we are arguing that Asian growth (i.e. Nikkei/SPX) is in a similar position today to the relative strength of crude oil back in March of 1999.

The point is that crude oil prices bottomed in the first quarter of 1999 which suggests that Asian growth should be making a bottom today. If the Nikkei is 10 years behind the commodity trend then it may be fair to argue that the Nasdaq is 10 years behind the Nikkei.

Below we show the Nasdaq Comp. from the current time period and the Nikkei 225 Index from 1998- 99. The idea revolves around the notion that ‘cyclical is cyclical’. When crude oil prices turned higher in March of 1999 the Nikkei also began to strengthen. The point that we are attempting to make is that if the Asian growth theme is going to turn positive then based on the ‘decade theme’ it should do so during the first half of this year. We will continue with this from a different perspective on the next page.