Chart Presentation: 1997Friday, September 21st, 2012
From Bloomberg yesterday, ‘Stocks fell as global data added to concerns about the economy. A Chinese manufacturing survey pointed to an 11th month of contraction and Japan’s exports fell in August… U.S. equities extended losses as Labor Department figures showed jobless claims decreased by 3,000 in the week ended Sept. 15 to 382,000.’
The argument has been that downside pressure on the cyclical trend- including yields- continues from the Eurozone and China while upside or offsetting pressure originates from an improving trend for U.S. employment. In both 2010 and 2011 the weekly jobless claims numbers drifted sideways to higher from April into September creating a downward bias for economically sensitive asset prices.
The point? Weekly jobless claims need to move below 350,000 to create traction for the recovery. Even the slightest indication that claims are moving towards 350,000 will help. Such was not the case yesterday.
In recent issues we have ramped up our fixation with regard to the cross rate between the Australian and Canadian dollar futures. The idea was that when the AUD/CAD breaks down through parity it suggests a slowing of Asian growth.
Yet… the markets tend to move in a series of ‘offsets’ with weakness in one sector creating or going with strength in another. At top right is a chart from 1996- 98 showing the time period leading up to 1998’s Asian crisis. The chart compares the AUD/CAD cross rate with the ratio between Ford and the S&P 500 Index .
The autos haven’t spent much time outperforming the broad market over the past few decades but one time frame that stands out would be 1997- 98. Crude oil prices began to decline at the start of 1997 so even though there was downward pressure on interest rates from falling commodity prices and a steady flow of money away from Asian the share price of Ford doubled relative to the SPX.
The current situation is shown below. We have the AUD/CAD on the north side of parity with at least the potential for a weakening trend back below 1.00, concerns about slowing growth in China, and a small uptick in the F/SPX ratio. All in all… a case might be made that there are broad similarities between the autumn of 2012 and the spring of 1997.
Let’s quickly circle back to the above argument so that can make an earnest attempt to explain where we were going with that particular chart-based presentation.
In yesterday’s issue we showed how long-term Treasury yields were being pressured lower by weakness in oil prices. We also showed how the share price of General Motors was trading almost ‘dead on’ the trend for yields.
The question is… can the autos remain stronger in the face of falling interest rates? The answer is… yes. But only if the pressure on yields is a result of a weaker trend for Asian growth and lower energy prices.
The next question might be… hasn’t China been slowing for some time? Hasn’t China’s manufacturing sector being contracting for 11 consecutive months? Shouldn’t we be closer to a bottom than a top? The first answer is… we have no idea. The second answer is provided by the AUD/CAD cross rate. If everyone knows that Asian growth is slowing then one would expect to see money moving from the Aussie dollar towards the Canadian dollar. If China is slowing and the U.S. is recovering then the forex markets should confirm this through weakness in the AUD/CAD. And that hasn’t happened. Yet.
The point is that while everyone might know something it isn’t actually a ‘thing’ until the flow of money confirms that to be the case. We have been showing the AUD/CAD because our sense is that we might not see a bottom for the ‘Asian growth’ trend until the cross rate washes out and history has shown that anything north of parity is no where close to a bottom.
Until the markets prove us right or wrong we will continue to focus on the AUD/CAD as an indicator of the flow of money towards Asian or North America as well as the ratio between crude oil and the CRB Index. If the AUD/CAD starts to decline at the same time as the crude oil/CRB Index ratio then an argument can be made for both the defensive sectors as well as the energy ‘users’ .
Just below is a chart of Wells Fargo and the CBOE Volatility Index . WFC broke out through resistance between 34 and 35. It is circling back to what now should be fairly serious support. Our concern is that it slips back into the 32- 34 range so that we have to do this all over again.
The next chart below compares the SPX with the U.S. 30-year T-Bond futures.
The TBond futures have declined to and then held at the 200-day e.m.a. line. If the TBonds continue to decline then the cyclical sectors will do nicely.
If the TBonds start to trend higher then the equity markets should confirm by selling the SPX down to its 50-day e.m.a. line . From there the trend will remain bearish for the SPX until the TBonds reach the next peak. Any declines in the SPX should be moderate, however, UNLESS the markets find some reason to push the TBond futures up through the highs set at the end of May. In the absence of this kind of drama we would expect the 1400- 1410 level to serve as reasonable support within the context of the rising trend that began in June.