Chart Presentation: Perspective
With the Eurozone in crisis, banks weak, commodity and equity prices declining... it probably feels a bit like the second half of 2008. But it isn't. At least not yet.
Let's start off today with a bit of perspective. Just below is a chart of the ratio between the S&P 500 Index and the price of the U.S. 30-year T-Bond futures.
The ratio has a rather wide downward sloping channel added to it that defines the trading range from 1997 to the present day. Every six years the ratio has declined to the bottom of the channel so if the trend continues it probably makes sense to avoid holding long position during 2014.
In any event the ratio went channel top in 2007 to channel bottom into March of 2009 which made for a fairly dramatic upward shift in bond prices and downward correction in equity prices.
While the ratio has most certainly declined this year the actual change is fairly close to that of 2010 and nowhere near as large as that of 2008. Our view has been that the ratio is working back up to the channel top with periodic corrections along the way to slow the pace of the advance.
Next is a shorter-term view of the equity/bond ratio.
Another argument has been that liquidity-driven corrections tend to remove the last 12 months worth of gains. In other words- similar to 1987 and 1998- the decline in the SPX/TBond ratio should take it back to the levels last seen in the late summer or early autumn of 2010.
The points that we are attempting to make are as follows:
The downward shift in equity prices and upward push by bond prices still looks like a fairly small relative price adjustment within a rising trend.
If history were to be kind enough to repeat the ratio should find some kind of support in the vicinity of 8:1.
Unless the markets find a whole new host of crises to fixate over the correction should be fairly close to complete with the next recovery beginning once long-term Treasury prices start to trend lower.
Equity/Bond Markets
Below is a comparison between the combination of copper and crude oil futures prices and the sum of the U.S., 30-year T-Bond futures and U.S. Dollar Index futures.
The premise is that bond prices and the dollar trend inversely to copper and crude oil prices so when the sum of the TBond and DXY is rising there tends to be downward pressure on the commodities market.
Consider the following. The sum of the TBond and U.S. Dollar Index has returned to the peak levels of late August in 2010. In other words the pressure from the dollar and bond market exerted on economically sensitive asset prices is as great today as it was that the worst point in time in 2010.
The sum of the TBond and DXY is also only about 5 points below the peak set in December of 2008 so while it has equalled the highs of 2010 it is now only about 5 points below the most bearish point of 2008.
Our view has been that only way to cap the rise for gold prices will be through dollar strength and bond price weakness. So far we have had bond price strength and, more recently, a rise in the U.S. dollar.
The chart below compares gold futures with the ratio between the price of the TBond futures divided by the Dollar Index. This ratio rises with stronger bond prices and/or a weaker dollar and falls with weaker bond prices and/or a stronger dollar.
The last chart below features the same comparison from 2008. The point is that a peak for gold should go with a peak for the TBond/DXY ratio so if, as, or when the bond market begins to weaken relative to the dollar we should see gold prices turn back to the down side.
The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.
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