On the positive side, one indicator we watch is the relationship between copper prices and the 30-year Treasury price. This serves as an indicator of economic growth expectations. As the price of copper (a proxy for industrial metals and hence economic growth) rises, and the price of treasuries falls (rates rise), bullish expectations toward economic expansion prevails. This ratio (Copper Vs. $USB) broke through resistance this week as marked by peaks seen in 2006, 2007 and 2008, and is a solid reinforcement of the uptrend in equities. See the chart below:
The CRB likewise has seen strength in industrial metals and agriculture (manifested in global price increases for food), despite the weakness in Gold prices as the "risk-on" trade (favoring equities) has re-emerged.
We also saw a surge in our LQD (corporate bond price) Vs. IEF (intermediate-term Treasury bond price) ratio. Historically, a flat to rising trend in this ratio has been positive for stocks. See the chart below:
Pacific markets have outperformed US equities since April 2010, but have given up that performance since Q4 2010. Although money has been flowing out of emerging markets (and bond funds) and into US equities, we believe this outflow has been overdone; our ratio of EPP (MSCI Pacific ex-Japan ETF) vs. the S&P 500 has found support off a rising trendline formed since early 2009. See the chart below:
On the downside, once again VIX has turned complacent, falling from its spike to 20 back down to below 16. For the Bulls out there, this would suggest cheap call options to participate in the rally. Another negative is the continuation of Dow theory divergence, as the Dow Jones Industrial Average closes in toward its recover high while the Dow Jones Transports lag (and fall). Airlines have been particularly weak, as rising oil prices may be taking its toll on the index. See the chart below:
Asset allocations out of bonds (and emerging markets) into US equities have helped to extend the current rally. February tends to be a weak month for equities, however, so we will position our expectations on the cautious side to protect our equity gains.
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