Chart Presentation: SPX

We are going to try to pull together a number of charts and arguments that we have been working on in recent days in an effort to build a somewhat coherent perspective while we still have the chance.

We start out today by showing a chart of the S&P 500 Index (SPX) from 1987 and a chart of China’s Shanghai SE Composite Index from 2007.

Aside from the Nikkei’s collapse post-bubble in 1990 there have been two ‘crashes’ of significance since the start of the 1980’s. The first was in 1987 focused primarily in the U.S. markets while the second occurred ten years later in Hong Kong. For some time we have wondered whether history would repeat with a third crash taking place this year.

The SPX and the Hang Seng both peaked in late August and crumbled in early October so, in a sense, the window for another such event has already closed. Since it is such an interesting topic, however, we will continue to how something similar could develop later this year.

In 1987 the SPX began to ramp higher at the start of January and after three months of sharply rising prices the index moved into a period of consolidation that lasted into late May. On May 26 the SPX blasted upwards only to make a second and final top almost exactly three months later in August 25. From there it took the usual 6 to 7 weeks to complete the ‘top’ followed by the actual ‘crash’ in October.

If we are going to compare the Shanghai Comp. to the 1987 SPX we have to shift the charts by about two months. The Chinese stock market began to push higher in earnest around the start of March only to peak three months later in late May. The momentum thrust that we are comparing to the SPX in late May occurred on July 20.

The idea is that similar to the 1987 SPX the Shanghai Comp. pushed upwards for close to three months, consolidated, and then moved on to new highs. If the comparison was absolutely exact the cycle peak for the Chinese equity market would occur some time around the end of this week (i.e. October 19) or early next week.

In a perfect world the ‘look’ of the top would be similar to the structure created between May and July with the first break carrying this index down below the 50-day e.m.a. followed by a second push back towards the highs next month. A ‘crash’, if one were to actually take place, would then be expected some time closer to the end of the year.

Below we show a comparative chart of crude oil, copper, and the CRB Index from 2006.

Last year the CRB Index made two peaks with the first occurring in May at the top for copper prices and the second three months later in August at the final high for crude oil prices.

The peak for copper was made on May 11 while crude oil prices topped out almost exactly three months later on August 9.

The idea has been that we could get a ‘double top’ once again in the commodity sector this year. To show that this is exactly what appears to have happened (hidden quite nicely by the off the charts move in oil prices recently) we show a comparison of the Australian dollar (AUD) futures and the stock chart of First Quantum Minerals (FM on Toronto). FM is engaged in the production of copper from mining operations in Africa so it is, in a sense, a nice surrogate for the commodity trend.

As mentioned there was a three month gap between the peak for copper and the subsequent highs for crude oil last year. This year the first commodity price peak was reached in mid-July and we can see that this also marked a clear top for both the commodity price-sensitive AUD as well as the share price of FM. Now the markets are working on the second commodity price peak dominated by energy prices.

Below we show the CRB Index and the ratio between the share prices of Caterpillar (CAT) and Coca Cola (KO). The thesis is that the CAT/KO ratio represents the equity market’s view of the commodity trend and we can see that veracity of the CRB Index’s rise is somewhat in question.

The points made so far are that if the Chinese equity market follows the expected path it should be at a top within the next few days and if the commodity trend repeats last year’s pattern it should also be working on its final top. All that remains now is for oil prices to stop pushing and the U.S. dollar to dig in and find some kind of bid.