Currency/Commodity Markets
We admit to ‘rambling’ somewhat today. We are struggling somewhat with the idea that anything of importance is going to change in the near-term because December is only days away and the tendency is for trends to change at the start of new quarters. In other words it is more likely that a strong market will become even stronger into year end while a weak market will decline or at best remain flat.
Below we show the U.S. Dollar Index (DXY) futures and the Baltic Freight Index (BFI). The argument is that a peak in ocean shipping rates can go with a major bottom in the dollar.
Last week the cost of shipping Middle Eastern crude oil to Asia increased by the most in almost three years. Our thought was that this represented a marked increase in supply heading towards end user markets that would lead to lower and not higher oil prices next month but, then again, we are somewhat biased.
In any event at right we combine the DXY and BFI into a ratio.
There have been a number of key trend change time frames but perhaps the two most important in recent years were 1995 and 2000. In 1995 the equity market trend shifted solidly over to U.S. large cap as well as tech and telecom with the trend running all the way into 2000 when it shifted back towards small cap and non-U.S. markets.
The DXY/BFI ratio bottomed through 1995 and again during 2000. While the post-1995 and post-2000 trends were almost exact opposites the ratio pivoted upwards on both occasions- which, we admit, is somewhat curious. It doesn’t tell us ‘what’ the trend change will be but it does argue that a major change in trend will occur ‘when’ the ratio bottoms and swings upwards. Given that the ratio turned sharply lower in early 2006 and may be working at a bottom late in 2007 we thought that it was quite possible that we will have something new to work on going into 2008.
Short-Term Views
At top right we show the Nasdaq Composite Index from 2000 and crude oil futures from the present time frame.
The initial comment is that a minor ‘double top’ is normal for a market that reaches a peak. The Nasdaq made two tops in March of 2000 while crude oil futures prices may be doing something similar this month.
Below right we show the Bank of Montreal (BMO) from 2000 and the stock price of Japan’s Mitsubishi UFJ (MTU) from 2007.
On Friday the financials finally rallied with stocks such as Fannie Mae coming up off of the lows. We have argued that the offset to energy price strength has been weakness in the financials so the idea is that the peak for crude oil prices is likely to occur around the time that the financials make some kind of bottom.
On page 3 we used the DXY/BFI ratio to argue that a stronger dollar or weaker ocean shipping costs often goes with a major change in trend for the equity markets. We noted that the ratio had turned lower in early 2006 and might be making a bottom now. The reason we mentioned the time frame (early 2006) was that this was also when down side pressure began to work on the financials- in particular MTU. If MTU is bottoming similar to the Bank of Montreal in 2000 then it is possible that oil prices are peaking in the same general way that the Nasdaq topped in March of 2000. In other words... if the financials have bottomed then oil prices could have topped and vice versa.
Trends tend to change at the start of new quarters and new years. The stock price of home builder Beazer (BZR) peaked in early January 2006 and then spent most of the year declining. Bear Stearns, on the other hand, didn’t top out until January of 2007 and has been negative for all of this year. It may be that sectors that rise to a peak into January of 2008 will become the focus of next October’s seasonal bout of fourth quarter crisis.
