by Kevin Klombies, Senior Analyst

Monday, October 8, 2007

Chart Presentation: Doing a Qualcomm?

In both 1998 and earlier this year the lows for the S&P 500 Index (SPX) were made at the peak for the product of theJapanese yentimes the U.S. 30-year T-Bond futures. In other words in times of perceived risk money seems to flee back towards the yen and into the long end of the Treasury market. Last Friday’s equity market strength, on the other hand, went with bothbond marketand yen weakness. We show the chart below.

The slope of the rising trend line under the SPX that reflects rising equities in response to falling bondsand the yen is so steep that we wondered whether the U.S. equity markets were getting set to ‘do a Qualcomm’ through the fourth quarter.

In 1999 QCOM’sstock pricewent ballistic through the fourth quarter of the year. QCOM raised guidance in September but after the earnings were reported in early November the stock price more than tripled into the end of the year.

At bottom right we show three U.S.stocks that have been tracking up their respective 50-day e.m.a. lines this year. We could also have included IBM in the comparison. Note that Intel, for example, provided positive guidance this past September and is due to report earnings next week. The point is that it felt back in 1999 as if the sheer intensity of the rise in QCOM’s stock price had much to do with speculative money trying to maximize returns for the year.




Equity/Bond Markets

The page 1 argument was that the close proximity of year end combined with the tendency of speculativemoney to attempt to maximize returns could have the potential to create fire works over the next two months. While not exactly a long odds proposition the chart comparison at right does help to support this view.

The Hang Seng Index has recently blasted higher to meet up with a trend line that began well back before the 1987stock marketcrash’. If we use a similar trend line for the SPX we come up with an upside target about 50% higher than current levels.

Below we show Qualcomm once again along with the stock price of China Southern Airlines (ZNH).

To some extent the third quarter price explosion in the Asian equity markets looks like a replay of QCOM’s ascent back in 1999. In other words it is hard to know whether the U.S. markets are capable of doing a Qualcomm right after a similar reaction by the Asian markets.

The bullish argument for North American stocks would fit with the chart comparison at bottom right of ZNH and Canada’s WestJet (WJA on Toronto).

WJA recently reported its 9th consecutive month of record load factor soquarterly earnings should be reasonable. We have shown on a few occasions that the charts of WJA and ZNH were virtually identical until this past May when the Asian trend began to accelerate into a parabolic rise. To the extent that the market is willing to buy growth at any price these days we had to wonder whether the decline in the TBonds and yen combined with the break to new highs by the SPX could lead to an intensely bullish outcome into year end for those companies capable of reporting surprisingly strong earnings over the next few weeks.