We added another detail to our overall thesis yesterday and in response dropped our positive view on the U.S. dollar. It wasn’t that we were no longer positive on the dollar but rather that we weren’t sure how the dollar might be impacted by a 2-month equity markets rally. Instead of holding on to our dollar positive position it seemed prudent to step aside until we were able to sort through a number of the possible combinations and permutations.

In yesterday’s issue we started off by showing the product of the U.S. Dollar Index (DXY) times commodity prices (CRB Index). The idea was that the current time frame was somewhat similar to the first quarter of 1999.

Belowwe show the combination of copper and crude oil futures prices (copper in cents plus three times crude oil in dollars) and the U.S. Dollar Index futures from 1998- 99.

The point is that while many believe that commodity prices can only rise when the dollar is weaker that is actually not the case. In fact some of the best cyclical trends have occurred when both were rising at the same time as was the case through much of 1999.

The DXY futures broke above the 200-day e.m.a. line in February of 1999 with the 50-day e.m.a. crossing up through the 200-day in early March. The chart shows that even as the dollar pushed upwards the sum of copper and crude oil began to rise. This relationship reflected a very strong cyclical trend that helped to drive the Nasdaq into the stratosphere.

Below we feature the same comparison for the current time period. The argument would then be that one of the hallmarks of a strong cyclical trend- the kind that could and would push long-term interest rates higher- is commodity price strength in the face of a stronger dollar instead of in response to a declining dollar. The sum of copper and crude oil has been moving higher since late February and has recently risen just above the 50-day e.m.a. line and through the rally highs set in January.

The point? We will continue to work on this but our initial sense is that dollar strength may serve as a positive instead of a negative for the equity markets.



Equity/Bond Markets

With Genentech closer to being taken over by Roche we suspect that Amgen will become even more important in our work. Today we are going to show a number of examples of why we tend to focus on AMGN from time to time.

The chartbelow compares AMGN with the S&P 500 Index (SPX) through the 1987 stock market crash. The initial point is that when the broad market starts to diverge from the trend for AMGN it is usually the broad market that ends up being ‘wrong’. Such was most certainly the case in 1987.

Belowwe show AMGN and the SPX from 1990- 91. Notice that AMGN barely paused when the broad market turned bearish in mid-1990 and in due course the stock market responded by driving back to the upside.

The SPX held flat through 1994 (chart below right) as AMGN pushed upwards. In other words if AMGN represents ‘the trend’ and AMGN was rising it was only a matter of time before the SPX resolved to the upside… which it did in spades during 1995.

All of this brings us to the present situation. The chart below shows that AMGN turned negative way back in 2005 which explains why the equity markets decline has been so compressed and severe.

AMGN was trading just under 60 only a few short weeks ago and we argued (we hope for obvious reasons) that a push up through 62- 63 would be a bullish event. Just to make things more complicated than perhaps that should have been AMGN (and the rest of the health care sector) sold off sharply and are now testing the lows made last year. In a perfect world AMGN not only holds well above the 2008 bottom but swings back up above 62 as we dig through the next few months.