2). This index is comprised of 27 commoditymarkets and is about equally weighted between food (49.8%) and industrial prices(50.2%). The commodities are assigned different weightings, which are determinedby imports into the European market in the 1984-1986 period.The markets with the heaviest weightings are copper, aluminum, cotton, timber,coffee, and the soybean complex. The composite index is subdivided into foods andindustrials. The industrials portion is further subdivided into metals and non-foodagriculturals. The index uses a base year of 1985 = 100. The Economist CommodityPrice Index does not include any precious metals (gold, platinum, and silver); nordoes it include any oil markets. The exclusion of those two markets may help explainthe bearish position of the Economist Index in 1989.Figure 8.22 shows that as 1989 ended, the global commodity index is droppingalong with money market prices (rising short-term rates). This is an unusual alignment, given the historical inverse relationship between those two barometers. As thechart shows, when commodity prices are falling, world money prices are generallyrising. How do we explain the discrepancy in 1989? The inflation scare that grippedthe global markets as 1989 ended and 1990 began was centered around the strongrally in the world price of gold (which is a leading indicator of inflation) and thesharp global advance in the price of oil.Weakness in the Economist Commodity Index in late 1989 might be partiallyexplained by its exclusion of gold and oil prices from its composition. This bringsus back to a point made in Chapter 7, namely, that it's always a good idea to keep aneye on what gold and oil are doing. The jump in those two widely-watched commodity markets as 1989 ended sent inflation jitters around the globe and caused globaltightening by central bankers.To add to the inflation concerns, the British inflation rate for 1989 was 7.8 percent, up from 4.9 percent the previous year, while the Japanese wholesale inflationrate for 1989 showed its first advance in 7 years. In the United States, it was reportedin early January 1990, that the U.S. inflation rate for 1989 had risen to 4.6 percent,its highest level in eight years, with an even higher wholesale inflation rate of 4.8percent. The British government had already raised the base interest rate from 7.5percent to 15 percent from mid-1988 to October of 1989. There was fear that anotherrate hike was in the offing. Japanese central bankers had raised interest rates threetimes since the previous May. There was talk of more tightening in Tokyo as the yenweakened and inflation intensified.
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That bad news on the inflation front as the new decade began postponed anyadditional monetary easing by the U.S. Federal Reserve Board, at least for the timebeing. In mid-January of 1990, Fed Vice Chairman Manuel Johnson and Fed GovernorWayne Angell, both of whom were mentioned in the previous chapter, stated that anyfurther Fed easing would be put on hold. Wayne Angell specifically mentioned theneed for commodity prices to start dropping as a requirement for further Fed easing.Advances in key commodity markets had heightened fears of a global shift to higherinflation and were clearly influencing monetary decisions made by central bankersaround the world, including our own Federal Reserve Board. Figures 8 23 and 8.24show the upward pressure on global interest rates as the new decade began. Figure8.25 reveals a strong visual correlation between global equity markets, many of whichwere setting new highs as 1989 ended.
SUMMARY
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FIGURE 8.24GLOBAL BOND YIELDS ARE TRENDING HIGHER IN 1989, LED BY GERMAN RATFS. BRITISHAND JAPANESE YIELDS ARE JUST BREAKING OUT FROM BASING PATTERNS. RISING GLOBALRATES EVENTUALLY PULL AMERICAN RATES HIGHER. (CHART COURTESY OF PRING MARKETREVIEW.)Foreign Bond Yields
SUMMARYThis chapter extended our intermarket analysis to the international realm. It showedthat trends in commodity prices (inflation), interest rates, and stocks are visible on
FIGURE 8.23FOREIGN SHORT RATES HAVE BEEN RISING AROUND THE GLOBE SINCE 1988 BUT STARTEDTO ACCELERATE UPWARD IN JAPAN IN 1989. (CHART COURTESY PRINC MARKET REVIEW.)Foreign Short Rates
a global scale. International currency trends are also important. Global indexes areavailable that allow intermarket comparisons among the the major financial sectors.AH world markets are interrelated. The U.S. market, as important as it is, doesn'toperate in a vacuum. Intermarket analysis can and should be done on a global scale.Overseas stock markets, especially those in Japan and England, should be monitoredfor signs of confirmation or divergence with the U.S. stock market. Overseas bondmarkets should also be watched for clues as to which way global interest rates aremoving. To gain insights into global interest rates, it's also necessary to watch worldcommodity trends. For that purpose, the Economist Commodity Index can be usedalong with certain key commodities, such as gold and oil.The study of gold and oil leads us to the next stop on the intermarket journey, andthat is the study of industry groups. Two global themes that were seen as the 1980sended were strength in asset-backed stocks, such as gold mining and energy shares,which benefit from rises in those commodities, and weakness in interest-sensitivestocks, which are hurt when bond prices fall (and interest rates rise). The relevanceof intermarket analysis for stock groups will be examined in the next chapter.
9
FIGURE 8.25A COMPARISON OF SEVEN WORLD STOCK MARKETS FROM 1977 THROUGH 1989. IT CAN BESEEN THAT BULL MARKETS EXIST ON A GLOBAL SCALE. WORLD STOCK MARKETS GENERALLYTREND IN THE SAME DIRECTION. IT'S A GOOD IDEA TO FACTOR OVERSEAS STOCK MARKETS INTO TECHNICAL ANALYSIS OF DOMESTIC EQUITIES. (CHART COURTESY OF BUSINESSCONDITIONS DIGEST.)
Stock Market Groups
It's often been said that the stock market is a "market of stocks." It could also besaid that the stock market is a "market of stock groups." Although it's true that mostindividual stocks and most stock groups rise and fall with the general market, theymay not do so at the same speed or at exactly the same time. Some stock groups willrise faster than others in a bull market, and some will fall faster than others in a bearmarket. Some will tend to lead the general market at tops and bottoms and otherswill tend to lag. In addition, not all of these groups react to economic news in exactlythe same way.Many stocks groups are tied to specific commodity markets and tend to rise andfall with that commodity. Two obvious examples that will be examined in this chapter are the gold mining and energy stocks. Other examples would include copper,aluminum, and silver mining shares. These commodity stocks tend to benefit whencommodity prices are rising and inflation pressures are building. On the other sideof the coin are interest-sensitive stocks that are hurt when inflation and interest ratesare rising. Bank stocks are an example of a group of stocks that benefit from declining interest rates and that are hurt when interest rates are rising. In this chapter,the focus will be on savings and loan stocks and money center banks. Other examples include regional banks, financial services, insurance, real estate, and securitiesbrokerage stocks.The stock market will be divided into those stocks that benefit from rising inflation and rising interest rates and those that are hurt by such a scenario. The workingpremise is relatively simple. In a climate of rising commodity prices and rising interest rates, inflation stocks (such as precious metals, energy, copper, food, and steel)should do better than financially-oriented stocks such as banks, life insurance companies, and utilities. In a climate of falling inflation and falling interest rates, thebetter plays would be in the financial (interest-sensitive) stock groups.STOCK GROUPS AND RELATED COMMODITIESThis discussion of the intermarket group analysis touches on two important areas.First, I'll show how stock groups are affected by their related commodity markets,and vice versa. Sometimes the stock group in question will lead the commoditymarket, and sometimes the commodity will lead the stock group. A thorough technical analysis of either market should include a study of the other. Gold mining shares14914<»
COLD VERSUS GOLD MINING SHARES150
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usually lead the price of gold. Gold traders, therefore, should keep an eye on whatgold raining shares are doing for early warnings as to the direction the gold marketmight be taking. Stock traders who are considering the purchase or sale of gold miningshares should also monitor the price of gold.The second message is that intermarket analysis of stock groups yields important'clues as to where stock investors might want to be focusing their attention and capital. If inflation pressures are building (commodity prices are rising relative to bondprices), emphasis should be placed on inflation stocks. If bond prices are strengthening relative to commodity prices (a climate of falling interest rates and declininginflation), emphasis should be placed on interest-sensitive stocks.THE CRB INDEX VERSUS BONDS
In Chapter 3, the commodity/bond relationship was identified as the most importantin intermarket analysis. The fulcrum effect of that relationship tells which way inflation and interest rates are trending. One way to study this relationship of commoditiesto bonds is to plot a relative strength ratio of the Commodity Research Bureau PriceIndex over Treasury bond prices. If the CRB Index is rising relative to bond prices,this means inflation pressures are building and higher interest rates will be the likelyresult, providing a negative climate for the stock market. If the CRB/bond relationship is weakening, this would suggest declining inflation and falling interest rates, aclimate beneficial to stock prices.Now this same idea will be used in the group analysis. However, this time thatrelationship will help determine whether to commit funds to inflation or interestsensitive stocks. There's another bonus involved in this type of analysis and that isthe tendency for interest-sensitive stocks to lead other stocks.In Chapter 4, the ability of bonds to lead the stock market was discussed at somelength. Rising bond prices are positive for stocks, whereas falling bonds are usuallynegative. Interest-sensitive stocks are closely linked to bonds. Interest-sensitive stocksare often more closely tied to the bond market than to the stock market. As a result,(urns in interest-sensitive stocks often precede turns in the market as a whole.What tends to happen at market tops is that the bond market will start to drop.The bearish influence of falling bond prices (and rising interest rates) pulls interestsensitive stocks downward. Eventually, the stock market will also begin to weaken.This downturn in the stock averages will often be accompanied by an upturn incertain tangible asset stock groups, such as energy and gold mining shares.COLD VERSUS GOLD MINING SHARESThe intermarket analysis of stock groups will begin with the gold market. This is alogical point to start because of the key role played by the gold market in intermarketanalysis. To briefly recap some points made earlier regarding the importance of gold,the gold market usually trends in the opposite direction of the U.S. dollar; the goldmarket is a leading indicator of the CRB Index; gold is viewed as a leading indicatorof inflation; gold is also viewed as a safe haven in times of political and financialturmoil.A dramatic example of the last point was shown in the fourth quarter of 1989and the first month of 1990 as gold mining shares became the top performing stockgroup at a time when the stock market was just beginning to experience seriousdeterioration. There is a strong positive link between the trend of gold and that of
gold mining shares. A technical analysis of one without the other is unwise andunnecessary. The accompanying charts show why.One of the key premises of intermarket analysis is the need to look to relatedmarkets for clues. Nowhere is that more evident than in the relationship between theprice of gold itself and gold mining shares. As a rule, they both trend in the same direction. When they begin to diverge from one another, an early warning is being giventhat the trend may be changing. Usually one will lead the other at important turningpoints. Knowing what is happening in the leader provides valuable information forthe laggard. Many people assume that commodity prices, being the more sensitiveand the more volatile of the two, lead the related stock group. It may be surprisingto learn, then, that gold mining shares usually lead the price of gold. However, that'snot always the case. In 1980, gold peaked eight months before gold shares. In 1986,gold led again.Figure 9.1 compares the price of gold futures (upper chart) with an index of goldmining shares (source: Standard and Poors). The period covered in the chart is from
FIGURE 9.1A COMPARISON OF GOLD AND GOLD MINING SHARES FROM 1985 INTO EARLY 1990. BOTHMEASURES USUALLY TREND IN THE SAME DIRECTION. GOLD LED GOLD SHARES HIGHER IN1986. HOWEVER, GOLD SHARES TURNED DOWN FIRST IN THE FALL OF 1987 AND TURNEDUP FIRST IN THE FALL OF 1989.Gold
S&P Cold Mining Share Index
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the middle of 1985 into January of 1990. There are three points of particular intereston the chart. Going into the summer of 1986, gold was going through a basing process(after hitting a low in the spring of 1985). Gold shares, however, where drifting tonew lows. In July of 1986, gold prices turned sharply higher (influenced by a risingoil market and bottom in the CRB Index). That bullish breakout in gold marked thebeginning of a bull market in gold mining shares. In this case, the price of gold clearlyled the gold mining shares.From the summer of 1986 to the end of 1987, the price of gold appreciated about40 percent, while gold stocks rose over 200 percent. This outstanding performancegave gold stocks the top ranking of all stock groups in 1987. However, gold stockstook a beating in October 1987 and became one of the worst performing stock groupsthrough the following year. Late in 1987, a bearish divergence developed between theprice of bullion and gold stocks and, in this instance, gold stocks led the price ofgold. From the October peak, the S&P gold index lost about 46 percent of its value.The price of gold, however, after an initial selloff in late October, firmed again andactually challenged contract highs in December.While gold was threatening to move into new highs, gold stocks barely manageda 50 percent recovery. This glaring divergence between gold and gold stocks was aclear warning that odds were against the gold rally continuing. Gold started to dropsharply in mid-December, and gold stocks dropped to new bear market lows. Backin 1986, gold led gold stocks higher. At the 1987 top, gold stocks led gold lower. Itbecomes increasingly clear that an analysis of either market is incomplete without acorresponding analysis of the other.As 1989 unfolded, it was becoming evident that an important bullish divergencewas developing between gold and gold shares. As gold continued to trend lower,geld shares appeared to be forming an important basing pattern. During September1989, the gold index broke through overhead resistance, correctly signaling that a newuptrend had begun in gold mining shares. Shortly thereafter, gold broke a two-yeardown trendline and started an uptrend of its own.Figure 9.2 is an overlay chart of gold and gold shares over the same five years;it shows gold shares leading gold at the 1987 top and the 1989 bottom. Figure 9.3provides a closer view of the 1989 bottom and shows that, although the gold marketwas forming the second trough of a "double bottom" during October, gold miningshares were already rallying strongly (the last trough in the gold mining shares was hitin June 1989, four months earlier). It's worth noting, however, that the real bull movein gold mining shares didn't shift into high gear until gold completed its "doublebottom" at the end of October. Something else happened in October of 1989 thathelped catapult the rally in gold and gold mining shares: That was a sharp selloff inthe stock market.As so often happens, events in one sector impact on another. On Friday, October13, 1989, the Dow Jones Industrial Average dropped almost 200 points. In the ensuingweeks, some frightened money flowing out of stocks found its way into the bondmarket in a "flight to quality." A large portion of that money, however, found itsway into gold and gold mining shares. Gold-oriented mutual funds also experienceda large inflow of capital. Figure 9.4 shows the S&P gold mining share index (upperchart) and a ratio of the gold mining index divided by the S&P 500 stock index (lowerchart).Figure 9.4 shows that, on a relative strength basis, gold shares actually began tooutperform the S&P 500 index in June of 1989 after underperforming stocks duringthe preceding year. However, it wasn't until the end of October and early November
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FIGURE 9.2ANOTHER COMPARISON OF GOLD AND THE S&P GOLD MINING INDEX FROM 1985 TOJANUARY OF 1990. AT THE 1987 PEAK, GOLD SHARES SHOW A MAJOR BEARISH DIVERGENCEWITH GOLD. IN LATE 1989, COLD SHARES TURNED UP BEFORE GOLD.Cold versus Cold Mining Shares
that an important down trendline in the ratio was broken and gold stocks really beganto shine. From the fall of 1989 through January of 1990, gold stocks outperformed allother stock market sectors. Gold mutual funds became the big winners of 1989. Goldhad once again proven its role as a safe haven in times of financial turmoil. Figure9.5 shows the bullish breakout in the gold shares coinciding with the October 1989peak in the stock market.Another intermarket factor that helped launch the bull move in gold was a sharpselloff in the dollar immediately following the mini-crash of October 1989. The weekafter the October stock market selloff, the U.S. dollar gapped downward and soonbegan a downtrend (Figure 9.6). Stock market weakness forced the Federal Reserve tolower interest rates in an effort to stem the stock market decline. Lower interest rates(and expectations of more Fed easing to come) caused the flight of funds into T-billsand T-bonds and pushed the dollar into a deep slide (lower interest rates are bearishfor the dollar). This slide in the dollar, in turn, helped fuel the strong rally in goldand gold mining stocks.
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FIGURE 9.3A CLOSER LOOK AT COLD VERSUS GOLD STOCKS FROM 1987 THROUGH THE END OF 1989.GOLD SHARES SHOWED A MAJOR BULLISH DIVERGENCE WITH GOLD IN 1989 AND CORRECTLY ANTICIPATED THE BULLISH BREAKOUT IN GOLD FUTURES IN THE AUTUMN.
GOLD VERSUS GOLD MINING SHARES
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FIGURE 9.4THE UPPER CHART SHOWS THE BASING ACTIVITY AND BULLISH BREAKOUT IN THE S&PGOLD MINING INDEX. THE BOTTOM CHART IS A RATIO OF GOLD STOCKS DIVIDED BYTHE S&P 500 STOCK INDEX AND SHOWS GOLD OUTPERFORMING THE MARKET FROM THESUMMER OF 1989. COLD SHARES REALLY BEGAN TO GLITTER IN NOVEMBER.
Cold versus Cold StocksS&P Cold Mining Index
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FIGURE 9.5GOLD SHARES VERSUS THE S&P 5OO STOCK INDEX. THE STOCK MARKET PEAK IN OCTOBER1989 HAD A LOT TO DO WITH THE FLIGHT OF FUNDS INTO GOLD MINING SHARES. GOLDAND GOLD MINING SHARES ARE A HAVEN IN TIMES OF FINANCIAL TURMOIL.S&P 500 Index versus Gold
GOLD VERSUS GOLD MINING SHARES
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FIGURE 9.6A GLANCE AT ALL FOUR SECTORS IN THE FALL OF 1989. AFTER THE MINI-COLLAPSE IN THEDOW INDUSTRIALS (UPPER RIGHT) ON OCTOBER 13,1989, T-BILLS (LOWER RIGHT) RALLIEDIN A FLIGHT TO QUALITY AND FED EASING. LOWER INTEREST RATES CONTRIBUTED TO ASHARP DROP IN THE DOLLAR (UPPER LEFT), WHICH FUELED THE STRONG RALLY IN GOLD(LOWER LEFT).
_____U.S. Dollar Index
Dow Industrials
Gold
Treasury Bills
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WHY GOLD STOCKS OUTSHINE GOLDDuring 1987 gold rose only 40 percent while gold shares gained 200 percent. Fromthe fall of 1989 to January 1990, gold shares rose 50 percent while gold gained onlyabout 16 percent. The explanation lies in the fact that gold shares offer leveragearising from the fact that mining profits rise more sharply than the price of the golditself. If it costs a company $200 an ounce to mine gold and gold is trading at $350,the company will reap a profit of $150. If gold rises to $400, it will appreciate invalue by only 15 percent ($50/$350), whereas the company's profits will appreciateby 33 percent ($50/$150). Figure 9.7 shows some gold mining shares benefiting fromthe leveraged affect of rising gold prices.OIL VERSUS OIL STOCKS
Another group that turned in a strong performance as 1989 ended was the energysector. Oil prices rose strongly in the fourth quarter and contributed to the rising
FIGURE 9.7GOLD VERSUS THREE GOLD MINING STOCKS. GOLD STOCKS APPEAR TO BE LEADING THEPRICE OF COLD HIGHER AS 1990 IS BEGINNING.Gold Futures
Homestake Mining
OIL VERSUS OIL STOCKS
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prices of oil shares. Rising oil prices help domestic and international oil companiesas well as other energy-related stocks like oilfield equipment and service stocks, andoil drilling stocks. The discussion here will be limited to the impact of crude oilfutures prices on the international oil companies. The basic premise is the same;Namely, that there is a strong relationship between the price of oil and oil shares. Todo a complete technical analysis of one, it is necessary to do a technical analysis ofthe other.Figures 9.8 and 9.9 compare the price of crude oil to an index of internationaloil company shares (source: Standard and Poors) from 1985 to the beginning of 1990.While oil shares have been much stronger than the price of oil during those fiveyears, the charts clearly show that turning points in the price of crude have had animportant impact on the price of oil shares. The arrows in Figure 9.8 pinpoint wheremajor turning points in the price of oil coincide with similar turning points in oilshares. Important bottoms in oil shares in 1986, late 1987, late 1988, and late 1989coincide with rallies in crude oil. Peaks in oil shares in 1987 and early 1988 coincidewith peaks in oil prices.FIGURE 9.8A COMPARISON OF CRUDE OIL FUTURES AND THE S&P INTERNATIONAL OIL INDEX FROM1985 INTO EARLY 1990. ALTHOUGH OIL SHARES HAVE OUTPERFORMED THE PRICE OF OIL,TURNING POINTS IN OIL FUTURES HAVE HAD A STRONG INFLUENCE OVER SIMILAR TURNING POINTS IN OIL SHARES.Crude Oil
Newmont Gold
Placer Dome
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FIGURE 9.9ANOTHER LOOK AT CRUDE OIL FUTURES VERSUS INTERNATIONAL OIL STOCKS. A STRONGPOSITIVE CORRELATION CAN BE SEEN BETWEEN BOTH INDEXES. IT'S A GOOD IDEA TOWATCH BOTH.
ANOTHER DIMENSION IN DIVERGENCE ANALYSIS
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FIGURE 9.10A COMPARISON OF OIL AND INTERNATIONAL OIL SHARES IN 1988 AND 1989. UPSIDE BREAKOUTS IN OIL PRICES COINCIDED WITH RALLIES IN OIL SHARES.Crude Oil
Crude Oil versus International Oil Stocks
S&POil Croup Index
Figure 9.8 also shows oil prices challenging major overhead resistance near$23.00 as 1990 begins. The inability of oil to clear that important barrier is causingprofit-taking in oil shares. Figure 9.9 uses an overlay chart to compare both marketsover the same five years. The strong positive correlation is clearly visible.Figure 9.10 provides a closer look at oil and oil shares in 1988 and 1989. Whilethe two charts are not identical, it can be seen that turning points in the price of oilhad an impact on oil shares. The breaking of down trendlines by crude oil at the endof 1988 and again in the fall of 1989 helped launch strong rallies in oil shares. Figure9.11 provides an even closer look at the second half of 1989 and January of 1990.In this case, oil shares showed a leading tendency. In November of 1989, oil sharesresolved a "symmetrical triangle" on the upside. This bullish signal by oil sharesled a similar bullish breakout by crude oil a couple of weeks later. A "double top"appeared in oil shares as oil was spiking up to new highs in late December of thatyear. This "double top" warned that a top in crude oil prices might be at hand.
As January of 1990 ended, both oil and oil shares are again trying to rally together. Figure 9.12 compares oil prices to individual oil companies—Texaco, Exxon,and Mobil. The "double top" referred to earlier can be seen in the Exxon and Mobil charts. The late December top in Texaco occurred at about the same time asthat in crude oil. As January is ending, crude oil is rallying for a challenge of contract highs. All three oil companies appear to be benefiting from the rally in oil futures, but are clearly lagging well behind oil as the commodity is retesting overheadresistance.ANOTHER DIMENSION IN DIVERGENCE ANALYSISWhat these charts show is that a technical analysis of the price of crude oil canshed light on prospects for oil-related stocks. At the same time, analysis of oil sharesoften aids in analysis of oil itself. The principles of confirmation and divergenceare carried to another dimension when the analysis of stock groups such as oil andgold are compared to analysis of their related commodities. The analyst is never sure
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FIGURE 9.11IN NOVEMBER 1989, A BULLISH BREAKOUT IN OIL SHARES PRECEDED A SIMILAR BREAKOUTBY OIL PRICES A COUPLE OF WEEKS LATER. AS OIL SPIKED UPWARD IN DECEMBER 1989, OILSTOCKS FORMED A "DOUBLE TOP," WARNING OF A POSSIBLE PEAK IN OIL.
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FIGURE 9.12CRUDE OIL FUTURES VERSUS THREE INTERNATIONAL OIL COMPANIES IN THE FOURTHQUARTER OF 1989 AND EARLY 1990. TEXACO APPEARS TO BE TRACKING OIL VERY CLOSELY.EXXON AND MOBIL TURNED DOWN BEFORE OIL BUT ARE BENEFITTING FROM THE BOUNCEIN OIL FUTURES.
Crude Oil FuturesCrude Oil Futures
Exxon
Texaco
Mobil
Oil Shares (S&P International)
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FIGURE 9.13THE UPPER CHART COMPARES INTERNATIONAL OIL SHARES TO THE S&P 500 STOCK INDEXFROM JANUARY 1989 TO JANUARY 1990. THE BOTTOM CHART IS A RELATIVE STRENGTHRATIO OF OIL SHARES DIVIDED BY THE S&P 500 INDEX. THE S&P OIL INDEX OUTPERFORMEDTHE MARKET FROM SEPTEMBER 1989 TO JANUARY 1990.
Relative Ratio of Oil Shares Divided by the S&P 500
SAVINGS AND LOANS VERSUS BONDS
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stocks and savings &• loan stocks were ranked at the lower end of the list. Moneycenter banks were ranked 193 out of a possible 197 for the last five months of 1989and the first month of 1990. Savings & loan shares did a bit better but still came ina relatively weak 147 out of 197 groups. Although most commodity stocks ranked inthe top 10 percent, most bank stocks ranked in the bottom 25 percent during thosesix months.That wasn't the case throughout all of 1989, however. Earlier that year, financialstocks had been the better performers, whereas gold and oil shares languished. Whatchanged toward the end of 1989 was a pickup in inflation pressures and a swingtoward higher interest rates. To make matters worse, the dollar and stocks came underheavy downward pressure in the autumn of 1989, fueling inflation fears and a flightfrom financial stocks to gold and energy shares. The very same forces that helpedinflation stocks, rising inflation and rising interest rates, hurt interest-sensitive stockslike savings and loans and money center banks. The sharp drop in interest-sensitivestocks that began in October of 1989 also warned that the