Last week we introduced the argument that the sum of the Canadian and Australian dollar futures (CAD plus AUD) could break to new lows through the first half of 2009. The idea was that these two currencies trend with commodity prices and trend in the opposite direction of the U.S. dollar (by definition).

In yesterday’s issue we expanded the argument somewhat by suggesting that a serious correction within a rising trend tends to involve the 50-day exponential moving average line crossing down through the 200-day e.m.a. line followed by a resumption in the rising trend while an end-of-trend event will eventually lead to new lows. Try as we might we can’t think of a simpler way to write this.

Belowwe show the S&P 500 Index (SPX). Notice that the SPX broke lower in late 2007 with the 50-day e.m.a. line crossing down through the 200-day e.m.a. at the end of the year. Once the moving average lines had crossed the SPX staged a counter-trend rally back towards the moving average lines followed by a second decline that moved to new lows. In other words around the middle of 2008 the SPX shifted from ‘correction’ to ‘trend change’ as new lows were reached.

Our purpose here is not to point out the historically obvious because it should be clear to all by now that this is a bit more than a correction. Our purpose instead is to create a template or set up that we can use for our currency-based arguments.

The commodity trend lasted so long and seemingly captured the imaginations of so many that even today there seems to be an almost desperate need by investors to time the bottom and get back into the commodity producers. We have been arguing otherwise for some time but it is still possible that we are wrong. Our view is that as long as the sum of the Canadian and Australian dollar futures (along with the euro) hold above the lows made last autumn one can argue that for as nasty as the weakness has been in the commodities sectors… it is still nothing more than a correction in a rising trend.

If the markets are reluctant to begin a new trend until the old trend has been well and thoroughly laid to rest… we have been arguing that the sum of the CAD and AUD (along with the euro) will break below October’s lows, make bottom around this year’s third quarter, and in the process the markets will shift over to a new capital spending-oriented theme.



Equity/Bond Markets

For good or for bad just about everything that we believe that we know about the markets has come as a result of making one or more rather large mistakes. The early 1980’s post-commodity price peak was one such example.

Belowwe show a comparative chart of the S&P 500 Index (SPX) and the ratio between heating oil futures and the share price of Ford (F) from early 1981 through into early 1984.

We have argued that the trend for the S&P 500 Index turns higher when the heating oil/Ford ratio peaks and turns lower. We have also argued that even if the trend is positive this does not mean that the broad U.S. stock market will rise although it does mean that when it eventually kicks back into gear it will do some with some gusto.

The heating oil/Ford ratio peaked in late 1981. After a few months of chopping (and trend ‘setting’) the SPX collapsed to new lows through into August of 1982. From there the SPX turned higher until it returned to the rising trend line originally set in late 1981.

While the SPX moved lower in 1982 this did not mean that all stocks were under pressure. The chart below right shows that Coca Cola and Intel actually turned upwards in early 1982 even as the stock price of Canada’s Bank of Montreal declined. We will continue with this point on today’s third page.

Below we show oil service giant Schlumberger (SLB) from 1983 through 1990 and the sum of the share prices of Cisco and Intel (CSCO + INTC) from 2003 forward.

The argument is that everyone wants to buy the dips for the last cycle but when a cycle ends it makes sense to move on to new themes. When the commodity theme peaked in 1981 there was a nice rally through into the stock market ‘crash’ in 1987 before the next positive trend began in earnest in 1989. Our thought is and has been that the techs and telecoms that peaked back in 2000 might be ready to turn higher this year.