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Figure A.2By the third quarter of 2003, the Nasdaq Composite had gained 70 percentfrom its October 2002 bottom. The next major resistance level for the Nasdaqis the peak formed at the start of 2002 near 2100. The Nasdaq/S&P 500 ratiohas been rising for a year. That kind of relative strength by the Nasdaq is usually good for the stock market. One cautionary note is that fact that the stockmarket has been rallying for a year. That’s the normal time span for cyclicalbull markets.
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Figure A.3After registering a five-year high near the start of 2003, the CRB Index spentfive months consolidating those gains. During July 2003, however, the CRBstarting rising again and reached a six-month high. That suggested that commodity prices were resuming their major uptrend. New weakness in the U.S.dollar during the third quarter of 2003 contributed to the buying of commodity markets (especially precious metals). The rising CRB Index during thesummer of 2003 also put upward pressure on long-term interest rates whichstarting rising as well.
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Figure A.4After plunging during the spring of 2003, the 10-year T-note yield startedjumping during June. By July, the long-term yield had exceeded its 40-weekmoving average and risen to the highest level in a year. Rising commodityprices and a stronger stock market had a lot to do with rising long-term rates.Rising commodity prices are potentially inflationary; rising stock prices area sign of economic strength. Bond yields jumped all over the world (including Japan) on increasing signs of a global economic recovery. Global fundscoming out of bonds moved back into the stock market.
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Figure A.5The 10-year T-note yield is testing the three-year down trendline extendingback to the start of 2000. A close over that trendline would confirm that longterm rates have bottomed. Over the prior three years, falling bond yieldswere a barometer of global economic weakness. Rising bond yields carry amore optimistic message for the economy over the short run. Over the longhaul, rising rates could threaten an economic recovery. The jump in bondyields also suggests that deflationary pressures are easing.
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67.5THE 10-YEAR T-NOTE YIELDIS TESTING A THREE-YEARDOWN TRENDLINE
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Figure A.6The Dollar Index peaked at the start of 2002 and broke a seven-year up trendline at the end of that year. The breakdown in the U.S. currency gave a bigboost to commodity markets (gold in particular). At the start of the fourthquarter 2003, the dollar is threatening the low it had formed during secondhalf of 1998. During the first week of October, a rebound off that low causedsome profit-taking in the gold market. The major trend of the dollar, however,is still down.
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Figure A.7Gold broke through the $325 level at the end of 2002, which exceeded the previous peak reached during 1999. That launched a new bull market in gold(and gold stocks). After briefly hitting a seven-year high, gold entered adownside correction at the start of October 2003. A surprisingly strong jobsreport on October 3, 2003 gave a boost to the stock market and the dollar.That caused profit-taking in gold and gold shares. The early 2003 pullback inbullion stopped at the original breakout point at $325, which is the new floorunder the gold market. The major trend of gold is still up.
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Figure A.8The Japanese yen surged to a three-year high versus the dollar in midSeptember 2003. That was the result of a G7 call for flexible exchange rates.The immediate result was an explosive upmove in the Japanese yen. Therising yen was more reflective of a strengthening Japanese economy andstrong money flows into Asian markets. It raised fears, however, that Japanmight cut back on purchases of U.S. Treasuries, which could result in higherlong-term interest rates in the states. The G7 message left little doubt thatthe United States wanted a weaker dollar.
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Figure A.9The Nikkei 225 rose to the highest level in fourteen months during September2003. Its move over the 40-week moving average during June was a chartsign that the trend was turning higher. The ratio of the Nikkei divided bythe S&P 500 started rising in April, which meant that Japanese stocks wereoutperforming U.S. stocks. Long-term interest rates in Japan started jumping during the summer, which reflected a move out of Japanese bonds andinto stocks. It may have also been a strong sign that deflationary trends wereeasing in Japan and elsewhere on the globe.
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Figure A.10Industrial Metals peaked during 1997 with the beginning of the Asian currency crisis, and signaled the start of global deflationary problems and economic weakness. Industrial Metals have broken a six-year down trendline.That’s a good sign for global economies. It’s bad news for bonds, however,since rising Industrial Metals are usually associated with rising long-terminterest rates. Rising Industrial Metals also suggest that global deflationaryproblems that started in 1997 have run their course. That means that deflation has given way to reflation.
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smaller stocks lead at bottoms, 209technology leadership is a goodsign, 204–205transportation leadership, 206–208yield curveanother view of, 214–215flattens during 2003, 213–214overview, 212–213
AAsian currency crisis and deflation in1997. See 1997 Asian currencycrisis and deflation
BBearish divergence, 21Business cycle, impact on marketsectors. See also Intermarketanalysis and the business cycleconsumer spending, relativestrength of, 202–203cyclicals starting to outperformstaples, 208economic cycle, different view of(Stovall’s circle), 200–201interest rate trends, 212Nasdaq leads market higher during2003, 205–206retail buying, 203–204sector leadership moves toconsumers and technology,201–202sector rotationwithin business cycle, 199model, 210supporting data, 210–212in 2000 favored contraction,199–200during 2003 suggest earlyexpansion, 201
CCMR (Morgan Stanley ConsumerIndex), 61, 107Commodity/bond ratio, 95Commodity divergence, 135CRB (Commodity ResearchBureau)/bond ratio, 49CRB (Commodity Research Bureau)index, 1–2, 33–34description of, 33–34industrial versus agriculturalmarkets, 34–37rise in early 1993, 34CYC (Morgan Stanley Cyclical Index),61, 208Cyclical bear markets, 150Cyclical stocks, 60
DDavis, Ned, 151Decoupling, definition of, 52Dollar bloc countries, 235263
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Dollar, fall during 2002 boostscommoditiesAsian deflation pulls U.S. rateslower, 138bonds and commodities decouple,132–133commoditiesdivergence, 134–135gain from battle against deflation,142inflation, 131prices and bond yields normallytrend together, 137dollar peak coincides withcommodity bottom, 132dollar top leads to new bull marketin gold, 142–143global bear market, 139–140industrial metals and interest ratestrend together, 135–136Japan pulling world markets lower,140–141possible swing back to hard assets.See Paper to hard assets,shifting fromU.S. stocks and interest rates falltogether, 141–142war premium pushes oil higher,133–134Dollar Index, 124
built-in asset allocation model,165–166charts comparing futures markets,166–167commodities versus bonds, 161–162commodity futures as an assetclass, 169currencies, treating as an assetclass, 171–172Dow/gold ratio, 162–163futures portfolios correlate poorlywith bonds and stocks,168–169gold/currency ratios are rising, 174gold is stronger than all majorcurrencies, 176gold measured in foreigncurrencies, 173–174impact of a falling dollar, 172including commodities andcurrencies, 163–165pushing the efficient frontier,169–171relative strength analysis amongasset classes, 159role of futures in asset allocation,165summary, 176–178using managed futures accounts,167–168
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Efficient frontier, 169–170
GCSI (Goldman Sachs CommodityIndex), 40Global divergence, 22Global thinkingall markets are related, 235–236bonds and stocks decouple, 239decade after market booms is notvery good, 240–243emerging markets, 237–238
FFirst Persian Gulf War. See 1990 andfirst Persian Gulf WarFisher, Kenneth, 225Futures markets and asset allocationbonds versus stocks, 159–161
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global trade increases impact ofexchange rates, 236–237intermarket implications fortechnical analysis, 243intermarket model is not static,238–239intermarket work is anevolutionary step, 244–245more intermarket emphasis onsector work, 238need for better peripheral vision,244still a lot to learn, 245why we need to study history,239–240Gold Index (XAU), 125–126Goldman Sachs Commodity Index(GSCI), 40Gordon, Ian, 196–197Group rotation, 71
HHard assets, shifting to from paperassets. See Paper to hardassets, shifting fromHead and shoulders bottom, 7Head and shoulders top, 124
IInflation-sensitive stocks, 49Interest rate-sensitive stocks, 37, 49Intermarket analysis. See also Globalthinkingbusiness cycle and. See Intermarketanalysis and the business cyclepicture in spring 2003. SeeIntermarket picture in spring2003principles. See Intermarketprinciples, review of
265
simultaneous analysis of fourfinancial markets, 5–6Intermarket analysis and the businesscyclebonds are the focal point, 182–183bonds as a leading economicindicator, 185business cycle explains intermarketrotation, 180–181chronological sequence of bonds,stocks, and commodities,181–182four-year business cycle, 179–180Journal of Commerce (JOC) Index,186lessons of 2000, 184–185market rotations during the 1920sand 1930s. See Marketrotations during the 1920s and1930ssix stages of the business cycle,183–184stocks and commodities as leadingindicators, 185–1862001 recessionpredicting, 186–187three markets followed properrotation for tops, 187Intermarket picture in spring 2003bond and stock prices trend inopposite directions, 119–120bonds and commodities trend inopposite directions, 116commodities follow lead of stocks,117–118dollarfalling dollar is bullish for gold,124–125letting it fall, 128–129major top in the making, 124Federal Reserve discoversdeflation, 127–128
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Intermarket picture (continued)goldfalling dollar is bullish for gold,124–125falling stocks are good for gold,122–123flight to, 115gold stocks shine, 125–127September 11 reversals, 116–117,120–122stocks lead commodities higher,118–119Intermarket principles, review ofadvantages of charting, 87–88asset allocation strategies, 82basic premise, 82–83currency trends, global impact of,89–90dollarimpact on drug stocks, 90–91impact on multinationals, 90McDonalds and Procter &Gamble profit from weakdollar, 90role of, 89small stocks are domestic, 91–92weak dollar helps service stocks,92economic forecasting, 88economic lessons, 87emphasis on sector work, 82evolutionary step in technicalanalysis, 81–82global markets, 83global sector trends, 83–84Japan effect overrides FederalReserve, 86–87Japan’s effect on U.S. markets, 84–86markets anticipate economictrends, 88–89overview, 81, 93–95technical nature of intermarketanalysis, 87
INDEX
Intermarket trends leading to markettop in 1999. See 1999intermarket trends leading tomarket topInverted yield curve, 97, 212Iraq crises1990, 12, 17–18, 22–23. See also1990 and first Persian Gulf war2003, 12
JJanuary Barometer, 100Japaneffect on U.S. markets, 84–86never recovers from first PersianGulf war, 32overriding Federal Reserve, 86–87pulls world markets lower in 2002,140–141real estate collapsed two yearsafter stocks, 233JOC-ECRI Index (Journal ofCommerce–Economic CycleResearch Institute IndustrialPrice Index), 37–39JOC (Journal of Commerce) Index,186
KKondratieff, Nikolai, 195Kondratieff wave, 195–197, 225
LLintner, John, 167Logarithmic price scale, 148Long, Clarence, 225–226Long Cycle, 225–226Long Wave Analyst, The, 196
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MManaged futures accounts, 167–168Market rotations during the 1920s and1930sKondratieff wave, 195–197lessons of long cycles, 194–195overview, 189rotating asset classes over decades,194sequence of eventscommodities peaked in 1920,189–190bonds bottomed during 1920, 190stocks bottomed during 1921, 190bonds turned down in 1928,190–191bonds and stocks decoupled in1929, 191commodities plunged in 1929,191stocks and commoditiesbottomed together in early1930s, 191–192reflating during the 1930s, 192bond yields spiked uptemporarily in 1931, 193stocks and commoditiescompleted bottoms in early1940s, 193–194Market sectors, 71Morgan Stanley Consumer Index(CMR), 61, 107Morgan Stanley Cyclical Index (CYC),61, 208
NNasdaq bubble bursts in 2000inverted yield curve implieseconomic weakness,97–98lessons of 2000, 113
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overview, 97sector rotation within economiccycle, 109–111seeing things as they happen ratherthan with hindsight, 98–99sequence of eventsJanuary 30 yield curve inversion,991969 all over again?, 99–100January lows broken, 100–101April 15, 2000, Nasdaq breaksmoving average line, 102April 15, 2000, NYSE fails a testof highs, 102cash is good, 101real estate funds (REITs) holdup, 103–104April 21, 2000, economic slowing,105copper and long rates peaktogether, 105economic weakness favorsconsumer staples, 107consumer staples start tooutperform, 107–108things could not be better, 108August 11, 2000, shift to value,108–109November 10, 2000, slowingeconomy, 112–113use of sector rotation diagram,113warning signs, 98why it is bad when energy andconsumer staples are strong,111–112Neckline, 7Negative divergence, 18New economy technology stocks,671920s and 1930s, market rotationsduring. See Market rotationsduring the 1920s and 1930s
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1980s, review ofoverview, 1sequence of eventscommodities peak in 1980, 2–3dollar bottoms in 1980, 3bonds bottom in 1981, 5stocks bottom in 1982, 5interrelationship of currencies,commodities, bonds, andstocks, 5–6stock market crash in 1987. SeeStock market crash of 1987global linkage examplesfollowing stock market crash,12delay in dollar’s impact, 12, 14–15end of decade, 15–161990 and first Persian Gulf warcomparisons between 2003 and1991, 31–32Japan never recovers, 32overview, 17–18sequence of eventsbonds turn down in early 1990,18–19CRB Index of commoditymarkets rises in early 1990,19–20bonds and stocks diverge,20–21global markets don’t confirm U.S.rally, 21–22Iraqi invasion of Kuwait, 22–23oil and gold soar, 24–25markets reverse at start of war,25–29divergence between oil and oilshares, 29importance of $40 oil, 29–30intermarket lessons, 30–311994, stealth bear market of. SeeStealth bear market of 1994
INDEX
1997 Asian currency crisis anddeflation, 511997 and 1998 only a dressrehearsal, 53bonds and stocks diverge in 1998,58–60bonds and stocks start to decouple,52bonds versus stocks, 57–58commodities versus bonds, 56–57consumer versus cyclical stocks, 60CRB/bond ratio and sector rotation,60CRB/bond ratio collapses during1997, 60–61deflation scenario, 52–53dollar versus commodities, 54–55Hong Kong and industrial metalspeak together, 56intermarket lessons of 1997 and1998, 64intermarket picture during 1997and 1998, 53–54overview, 51plotting ratio of two competingsectors, 63–64relative strength analysis, 61–631999 intermarket trends leading tomarket topAustralian dollar and commodityprices, 79–80commodities and interest ratestrend together, 67commodities jump in start of 1999,67financial stocks lose favor during1999, 73–74global influences, 77–78Hong Kong and semiconductors,78–79impact of rising interest rates onstocks, 70
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industrial commodities and oilbottom, 68intermarket sector effect, 71NYSE advance-decline line falls in1999, 70rising crude oil good for oil shares,71–72sector influences, 74–77sector rotation and the economy, 77transportation stocks fall hard,72–731998 trends reversed in 1999, 65–67
traditional markets, not manyalternatives in, 156using futures market, 154, 156why 2003 was not a replay of 1991,149Persian Gulf Warsfirst, 12, 17–18, 22–23. See also 1990and first Persian Gulf Warsecond, 12Portfolio insurance, 7Presidential cycle, 179Pring, Martin J., 181, 183–184Program trading, 7
OOld economy stocks, 67
PPaper to hard assets, shifting fromChina not affected by dollar moves,154commodities outperform stocks forfirst time in 20 years, 148–149commodity currencies rally, 154commodity-related stocks,156–157cyclical versus secular trends,150–151falling dollar hurts global markets,153–154gold breaks 15-year resistance line,145–146gold comes back into favor, 145gold turns up as stocks turn down,146–148historical research on cyclical