Given that markets bottom when everyone expects that prices have to go lower we thought we would try to find at least one reason why the cycle lows may already have been reached for the S&P 500 Index. This might be a bit of a stretch but, then again, stranger things have likely happened. Perhaps.

To make our case we are going to use a chart-based argument that we have presented in these pages on numerous occasions in the past. The idea is that the last time we waded through collapsing Asian growth, tumbling real estate prices, and Citigroup teetering on the edge of bankruptcy was in 1990 so we will use this time frame for our comparison.

The chartbelow compares the stock price of Citigroup (C) along with the ratio between the Amex Oil Index (XOI) and the S&P 500 Index (SPX) from mid-1989 through into mid-1991.

The argument starts with the observation that the low point for both C and the SPX occurred right after the cycle peak for the XOI/SPX ratio. In other words the financials and the broad market remained under pressure as long as the oils were outperforming but once the oils began to lose relative strength the stock market turned upwards.

The intriguing detail on the charts is that the XOI/SPX ratio peaked in February of 1990, declined through June, and then pushed upwards even as Citigroup’s stock prices melted lower day after day. This ‘second surge’ in the XOI/SPX ratio to a final peak that marked the lows for the S&P 500 Index is definitely relevant to today’s situation.

We show atbelow the same comparison for present time frame. Notice that the XOI/SPX ratio reached a peak around the middle of 2008, declined into October, and then pushed upwards through into January. In other words the oils may have completed the ‘second surge’ that, in theory, is supposed to go with relentless and emotional selling in the financials. So far, so good.

The comparison to 1990 may not be perfect but it does have a certain appeal. Many months ago we suggested that the start of equity markets strength in 1990 was marked by the XOI/SPX ratio declining back through its 50-day exponential moving average (e.m.a.) line (blue-green line on the chart). As of the close of trading on Friday the ratio was sitting almost exactly on this line.



Equity/Bond Markets

Feb. 20 (Bloomberg) – U.S. stocks fell, capping the worst weekly drop in three months for the Standard & Poor’s 500 Index, as concern bank shareholders will be wiped out by government takeovers snuffed out a late afternoon recovery.

The obvious point is that there is no such thing as an equity bull market without a rising trend for the major financials. The only way that a case can be made for a stock market is bottom is if the markets find some reason to stop hammering the banks, brokers, and insurers into the dirt.

Belowwe show two comparisons between the S&P 500 Index (SPX) and the XOI/SPX ratio. This is another shorter-term spin on the argument presented on page 1.

The argument is that the equity markets bottomed around the time that the XOI/SPX ratio reached a peak and then turned higher after the ratio broke below the 50-day e.m.a. line. Our point here is that the XOI/SPX ratio pushed up through 1.10 (i.e. the XOI rising to more than 10% higher than the SPX) in January and has just moved back down to this level. In other words… chart-wise we can make a case that the stock market is at a bottom but only- and this is the important detail- if the financials start to rise on both an absolute and relative basis. More on this on page 5 today.

Returning to a ‘macro’ perspective we show below a chart comparison between the sum of Ford (F) and General Motors (GM) along with the spread or point difference between the S&P 500 Index (SPX) and the Amex Oil Index (XOI).

A negative trend for the autos began way back in early 1999 after oil prices reached a bottom. From 1999 into 2009 the trend has involved falling auto stock prices and positive relative strength for the oil stocks. The point? If the oils start to underperform the broad market then we can make a reasonable case for the start of a lasting recovery period for the autos.