Chart Presentation: Like 2001

We are going to have to do this quickly. The argument is that foreign equity markets like China’s Shanghai Composite Index are similar to the Nasdaq back in 2000. The chart at right shows that the Nasdaq peaked close to 9 months ahead of energy prices (crude oil times natural gas) while the Shanghai Comp. topped out last autumn close to 9 months ahead of energy prices this year.

If history were to repeat energy prices should bottom towards the end of next year’s second quarter while the Shanghai Comp. would reach a low during the first half of 2010.

The point, however, is that the markets tend to work through offsets. By this we mean that weakness in one sector creates or builds strength in another. To explain we show a chart of U.S. home builder DR Horton (DHI) along with the U.S. 30-year T-Bond futures from 2000 into 2002 below.

Thebond marketbegan to rise at the start of 2000 just in front of the peak for the Nasdaq. In the current cycle bonds turned higher at the end of last year’s second quarter a few months ahead of the peak for the Shanghai Comp. As bond prices rose through 2000 and into 2001 the home builders trended higher. In theory… one might have been able to make the intuitive leap that pressure in tech and telecom was helping to create a bull market in real estate. To the extent that today is similar to early 2001 the challenge is to try to determine what sectors are starting to lift in response to falling interest rates.