by Kevin Klombies, Senior Analyst

Wednesday, May 28, 2008

Chart Presentation: Up and Down, Back and Forth

From 1980 into 2007 the major trend shifted back and forth from the financials to the commodity producers. However, when the U.S. Dollar Index broke below the 80 level last year what started off as a trend became excessive enough to be termed a ‘bubble’. Downward pressure on the commodity producers should increase as the DXY moves back up towards 80.



Equity/Bond Markets

Equity markets-wise there is still a chance of an ugly (bearish) outcome over the near term. To explain we start with the comparison between Coca Cola (KO) and the Amex Oil Index (XOI) at right.

Towards the end of last December the XOI began to decline along with the S&P 500 Index as crude oil pricespushed to new highs. When the XOI finally turned lower at the start of January thestock priceof KO snapped upwards. Notice that the XOI recently turned lower after breaking to new highs (similar to last December when the XOI made new highs and then failed back to the down side) and that has gone with a couple of points worth of strength for KO.

Below we show 10-year Treasury yields, crude oil futures, and the SPX from late December into the end of January this year. The SPX peaked with 10-year yields and then both began to trend lower while crude oil prices pushed upwards for another week or so on the way to 100. As crude oil prices declined from 100 back to 87 the SPX fell from 1500 to 1300 while yields backed down from 4.3% to 3.3%.

The point is that the SPX turned lower a week ago, the XOI has reversed to the down side, and now crude oil prices are starting to show weakness. If this time is going to be different then we should see it in the bond market. Yields rising above 4.0% should be equity markets bullish while yields moving back below 3.73% would be bearish.