Both the U.S. Dollar Index (DXY) and the price of the U.S. 30-year T-Bonds were lower in trading yesterday. The equity markets rose in response.
The Ragin’ Cajun, Jim Carville, once said that, “I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”
The point, we suppose, is that it seldom makes sense to argue with the bond market. On the other hand when the action in the bond market is creating an offsetting trend in the equity markets it makes perfect sense to go along for the ride.
Below is a comparative chart of, from top to bottom, the S&P 500 Index (SPX), the price spread or difference between the 30-year and 10-year U.S. Treasury futures, and the sum of the U.S. 30-year T-Bond futures plus the U.S. Dollar Index (DXY) futures.
The argument is that some time around late August or September of last year the bond market and the dollar began to flatten out. The sum of the TBond and DXY moved into a trading range between around 210 and 227 while the 30-10 price spread- which tracks up and down with bond prices- settled into a range between +7 and +14.
We suggested months ago that if both of these combinations busted to new highs we would have a definite problem with cyclical growth. Over the ensuing time period the dollar and bond market have taken a number of hard runs at the top of their respective channels but have, so far, failed to push through.
The offset to a flat trend for the dollar and bond market has been a steadily rising trend for the equity markets. While the trading channel for the SPX may or may not be drawn too ‘steeply’ the idea is simply that calmness for both bonds and the dollar is being interpreted as a bullish ‘driver’ for equities.
If, over the next few days or weeks, the sum of the TBond and dollar were to work back down to the lower part of its trading channel then there is a reasonable chance that we could see the SPX trading north of 1400.
Equity/Bond Markets
We are going to do something a bit different today as we take a look at the mining sector in general and the gold miners in particular.
Below is a chart of the Philadelphia Gold and Silver Index (XAU) and the ratio between copper futures prices and 10-year Treasury yields from 1994- 96.
The argument is that the gold miners tend to trend higher in price as long as the copper/10-year yields ratio is rising. Stronger copper is bullish for mining stocks while falling yields tend to support gold prices and equity valuations.
We have argued that the time to jump ship on the gold miners is after the copper/yields ratio has broken its 200-day e.m.a. line and, even then, that is often somewhat too early. A ‘cross’ by the 50-day e.m.a. down through the 200-day e.m.a. may be a better ‘trigger’.
Below is the same comparison from 2007- 09. Notice that the XAU remained stronger until a few months after the copper/yields ratio began to decline.
Last is the comparison based on the current time frame.
Notice that similar to 1995 the copper/yields ratio may be making a ‘double top’. On the other hand on the second top in late 1995 the XAU went on a tear to the upside which is somewhat similar to what we have seen for this index over the past month. Chart-wise a case can be made for further gains for the gold mining sector until the copper/yields ratio breaks down through the 200-day e.m.a. line in response to a rapid increase in 10-year Treasury yields.
