Dow/copper: Markets at critical stage

I’d like to revisit the view of markets that we concluded with on Thursday but from a slightly different angle this time. I believe this will confirm our previous (although possibly erroneous) conclusions and give us some additional insight into what we may be in for, or at least what we should be looking for if things do not go the way we expect. A kind of theoretical exit strategy, if you will.

First off, while writing the previous post, I postulated a handful of relationships that time did not permit me to cross-check either historically or ‘mathematically’, for lack of a better term.

I am going to set aside the question of history due to a relative lack of means, although it may be something we look into again in the coming days and weeks. But, it is possible, I think, to solidify some of what we argued at least regarding the short term.

Much of what I have argued has been founded on the conclusions reached using the copper/gold or gold/copper ratios. On the last occasion, I attempted to bolt the Dow/bond ratio onto that formulation. Without returning to that specifically, if it is true, then the following two charts should also bear a resemblance to one another.

Dow/copper ratio

30-year bond/gold ratio

We have two relatively timid assets against two commodities that have been breaking records, so it’s not a great surprise that they should resemble each other, but the Dow/bond ratio already seemed to more or less match the copper/gold ratio, so this is just confirmation of that conclusion. Bonds can’t go much higher, so if the Dow is going to outperform copper, it will almost have to be in conjunction with gold weakness. But, it might also be on the back of copper weakness, as well.

Now, we have been arguing that for copper to get separation on gold, it would require yields to start rising against the dollar, but that is generally a bullish set-up for commodities of any stripe. So, for gold to go down, to repeat our previous posts, yields would have to outstrip copper.

We believe this is how things are going to unfold, but obviously, it doesn’t take a lot for this whole construction to fall apart. For example, copper and yields could resume their move up, as we have argued, but if we have underestimated copper and/or overestimated yields, then gold will continue to rise and probably continue to outstrip the Dow.

These charts and our interpretation of them put us in a difficult spot, then, because so far over the course of the last two years, moves upward in these ratios have coincided with general market weakness. But, we are arguing now that it is possible (okay, I’ll say ‘likely’) that these ratios are about to break through the top side of the trading ranges and that this will be a bullish development rather than a bearish one. Recent history and our analysis here must give us mixed feelings if and as these ratios rise to meet their trend lines.

Somewhat paradoxically, we are arguing that a resumption of the downward drift will also be bullish, but the question is what kind of bull we should be on the lookout for. A ‘calf of gold’ or an equity bull? Over the long term, strong gold will drag the equity markets with it to some extent, but if equities are finally ready to take the lead, then gold will slump. In other words, for the immediate future, stocks are probably the least risky bet to make and they are potentially the most profitable bet to make. Over the longer term, gold is the play to make, but getting into gold at the moment seems a tad panicky. Even if it is going to resume its move upward, if it really has that much room to run in the intermediate term, I would argue that it is best to wait and see how the market turns out of this slump before making a big move back into gold. And, even if the trend of the last two years—check that, decade—is going to continue, there is every reason to believe that stocks are near their bottom and will recover. One would expect that, at the very least, gold will pull back as panic subsides. It seems likely that in almost any case—bar an unforeseen calamitous collapse of the markets—gold can be bought for an equal or lesser price in the near future.

Here’s another look at the Dow, and for the love of me, I have to confess I don’t really understand what this is telling me.

Dow/10-year yield ratio

10-year bond/dollar ratio

Pretty straightforward on the face of it. Yields going up drive bond prices down, and the Dow has had an inverse relationship with the dollar. It’s a little odd to see the Dow breaking to new highs in this environment, until you remind yourself that this the Dow up against yields, and then it makes sense again.

What struck me as odd, however, and maybe I am just demonstrating my poor grasp of simple market facts is that one would expect the Dow/yield ratio to be the inverse of the dollar/yield ratio, but it just doesn’t work out like that.

My tentative reading of these tea leaves is that, as we know, the Dow is plugged into the commodity markets, and both are a product of loose monetary policy and a weak dollar. But, what then are we supposed to make of the apparent breach of the trend line? Does this say that my entire thesis about a collapse in bonds is bogus, or is this a false breakout?

Let’s say that things were to more or less go how I’ve been arguing they would: stocks up, gold and silver down, yields up (bonds down, of course), industrial commodities up, and the dollar….up? If precious metals are going down, it’s hard to argue that the dollar would not be strengthening, but it’s not impossible, either. But, setting aside the dollar for the moment, it’s hard to imagine the Dow continuing to outstrip yields, especially when we are pushing for proportionally significant jumps in yields (as a random example, say by 50%). But, if yields go past 300bp, what are the chances the Dow is going to go to 15000 in that same span of time? But, assuming the relationship with the bond/dollar ratio held, the dollar would have to be falling faster than bonds. And, so, why bet against gold, if that’s the case?

If our scenario is to work out then, it would appear the only way it could happen is if the dollar rises and yields outstrip the Dow, which would mean that these are false breakouts. Everything hinges on (again) the copper/yield ratio.

If the present relationship between the Dow and the dollar (i.e., inverse correlation) is to break down, it must be via a powerful surge in yields.

So, let’s go to our third look at the Dow.

Dow/dollar ratio


Dow/dollar ratio: resistance is not futile

I like the Dow/dollar ratio chart so much, I had to put it up twice. The second one is just beautiful, though, in my opinion. The proportion of the distance between the blue and green resistance lines is identical to that between the green and red resistance lines. The advances are perfectly orderly, and the retreats occur in identical fashion, as well. If you look close enough, even apart from the points A, B, and C that I’ve marked, in each instance prior to part A, there was a small rally back to the resistance line.

In the current instance, it is possible that there is a line of resistance around 150. Whether it is 150 or 138, it seems as if, much like we indicated on Thursday, if the bottom is not here, it is pretty darn close. If the Dow breaks below 138, well, then go ahead and stock up on gold and ammunition, I suppose, but the shallowness of the point A dip and apparent tentativeness of the shot at 138 this week suggests that the 150 line may be more salient than the 138 line.

Copper/gold is not quite as (apparently) clear-cut as the Dow/dollar ratio, unsurprisingly, but it appears to be at a major resistance level, and it will be something to watch in the coming week or so.

The following critical ratio has been flashing the same thing.

yield/dollar ratio: second thoughts about stepping into the abyss?

You can see that any way things turn out, it’s going to be a good show. The weight of all the evidence points to the extreme likelihood of a return to bullishness.

We think we have a more or less solid understanding of where markets are going in the coming weeks, then. The one huge question hanging over the market is, what about gold? And, to a lesser extent, silver?

gold/silver ratio

platinum/copper ratio

These are not perfect equivalents, but there does seem to be something of a relationship. And, more interestingly, like many of the ratios we’ve been looking at today, they appear to be at critical levels. If, as I believe we argued last time, platinum is a shoe-in for the Dow, this is a very interesting set-up, because platinum looks like it may be ready to breach copper.

But, this brings us back to the Dow/copper ratio we mentioned above. Each of the times platinum was pushing against copper over the course of the last three years, it was due to copper weakness rather than wider market strength.

Dow/copper ratio

The impression these charts give is that if the Dow should not only rebound, but rebound against copper, then gold would further strengthen against silver. But, if the Dow or platinum are to achieve real progress against copper, then this would likely mean gold weakness, and if gold were outperforming silver, then by extension that would mean silver would be in something like free fall.

Platinum/silver then may be one of the best ways to keep an idea of where the Dow/gold ratio is going, with a collapse in the former being bullish for the latter.

silver/platinum ratio

By and large, however, it is hard not to conclude that stocks are oversold and the save havens overbought.

gold/Dow ratio

copper/yield ratio








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