We have argued from time to time that the current market is roughly the opposite of 2000. In other words stock prices were pushing to the highs into March even as long-term yields had begun to decline. This year equity prices were crumbling into March months after long-term yields had begun to rise.
We are going to take another run at this argument from a different perspective today. The idea comes from the recent weakness in medical products maker Abbott Labs (ABT).
Belowwe show a chart comparison between ABT and the Nasdaq Composite Index from July of 1999 through 2000. The argument begins with the observation that the peak for the Nasdaq in March of 2000 was reached at a low point for ABT. In other words money was being drawn away from the consumer and health care sectors and into blazing hot tech and telecom names.
The point is that once the Nasdaq reached a peak in late March of 2000 the stock price of ABT had found bottom and through the rest of the year as the Nasdaq weakened the trend for ABT was nicely positive.
Turning to the current time frame we can see that ABT has been under pressure since last autumn. We can also see on the chart at bottom right that the markets have been pushing gold prices higher even as ABT has declined.
The thought is that in October of 1999 the markets shifted hard into the Nasdaq and as the Nasdaq drove upwards the trend for ABT was most definitely lower. This time around the cast of characters is somewhat different but money most definitely started to drive away from certain markets and towards others last October. The pivot for capital flows was made in October of 1999 and again in October of 2008 which supplies us with our leap of intermarket logic.
If gold prices are trending higher in response to capital flows and those flows are pulling money away from ABT and… given that the process began in October similar to 1999 and… the Nasdaq broke to the down side towards the end of March and… the trend for gold prices is starting to feel a bit ragged… then our thought is that we should really start to like ABT if gold prices break back below 900 while ABT resolves briskly back above 50. It does make for a nice set up.
Belowwe feature a comparison between gold futures and the U.S. 30-year T-Bond futures.
Gold is part commodity and part ‘money’. It is a metal similar to copper and it is also a store of value so the trend for gold is influenced both by the trends for commodity prices and interest rates. While copper will tend to be stronger when interest rates are rising gold is usually better when interest rates are falling.
Last week when the TBond futures declined very close to 125 the price of gold futures drifted back to roughly 900. Following the Fed’s announcement on Wednesday that it was going to begin quantitative easing (direct purchases of long-term bonds) two things happened- the bond market spiked higher and gold prices staged a wild intraday reversal from below 900 to well above that level.
Our thought is that the reactions were so extreme that 900 for gold and 125 for the TBonds have to represent major support so it would appear likely that a break below support by one could go with or lead into a similar break by the other.
Below we show a chart of Hong Kong’s Hang Seng Index and the spread or price difference between copper (in cents) and crude oil (in dollars multiplied by 3 times) from 1996 into early 1998. We show a similar comparison for the current time period below using China’s Shanghai Composite Index.
The argument is that ‘strong copper’ tends to go with Asian growth. When the copper minus crude oil spread broke support in July of 1997 it led into an absolute massacre for the Hang Seng Index. The point is that the cyclical trend since 2008 has been driven once again by Asian economic strength so… if the copper minus crude oil spread were to fail back below the 200-day e.m.a. line in a manner similar to 1997 then we could see an abrupt trend change back to more defensive sectors.