Global Outlook

Cyclicals

Contributed by eResearch

A more intelligent person would probably suspend publishing a daily markets report until the markets get back to actually trading. We realize that the futures markets are open but until the U.S. equity market returns to some semblance of normality... there are only so many way we can think of to spin the same arguments.

We have a variety of theses that hopefully dovetail into one major view. We have argued that cyclical bottoms tend to be made in the autumn with a particular emphasis on the autumn of the second year of each decade. For months and months, we have been focusing on this particular point in time to mark some kind of cyclical low.

Another view has been that the markets seem to be trading in a similar manner to 1996-97. This was the time-frame following the peak for the commodities trend with money rolling away from the commodity currencies and BRIC-related themes. This was a particularly positive time for the energy 'using' cyclicals.

A third view relates to the way the bond market has been driven to the top of its very long-term trading channel in response to cyclical weakness. We suggested that this was similar to 1986-87 in some ways, although the 'driver' for bond prices at that time was the collapse in crude oil prices. This time around, the pressures have tended to emanate from the relentless series of crises emanating from the Eurozone with periodic help from tech and Asian weakness.

Below is a chart of crude oil futures and the U.S. 30-year T-Bond futures from 1986. The basic point is that the bond market did not reach a final peak until oil prices reached bottom through the second and third quarters of 1986.

Below is the current situation. If there is a shoe left to drop that would extend the duration of the TBond's visit to the channel top it might come from additional pressure on oil prices. If, on the other hand, crude oil futures prices have already bottomed out then we are that much closer to the start of a cyclical pivot.

The point? The current or recent trend has been based on a flat bond market and a steady rise in valuations for stable and non-cyclical stocks. Eventually the trend will shift back to the cyclicals with the transition taking place significantly quicker if crude oil prices have already made some kind of lasting price bottom.