We start off today with a chart comparison from 1998- 2001. The chart shows the U.S. 10-year T-Note futures and the ratio between the share price of medical products maker Abbott Labs and the S&P 500 Index .

We should probably admit that we aren’t quite sure where we are going with this one. The argument has nothing to do with the bond market or the share price of ABT but we will use this as our jumping off point.

The downward trend for the T-Notes as well as the ABT/SPX ratio between 1998 and early 2000 was an offset to strength in the tech sector.  As the Nasdaq roared towards 5000 money was being pulled away from more defensive sectors as cyclical strength resulted in higher interest rates.

What has always intrigued us about this comparison is the ‘V-shaped’ nature of the pivot. Month after month and quarter after quarter capital shifted towards the Nasdaq until the trend finally shifted around the end of the first quarter in 2000. From there the bond market regained all of its losses as the ABT/SPX ratio rose back to and then through its original starting point.

In a sense this is one of the reasons why the markets are so frustrating. What is ‘real’, in a sense, is momentum. Today’s one-way trend becomes tomorrow’s investment grave yard as money follows whatever appears to be working.

To get to our point we show below right a chart of the ratio  between the grains etf and the gold etf .

From the second half of 2008 into 2010 the trend that favored gold over the grains was well defined. In fact it was almost too well defined. Chart-wise it looks similar enough to the falling trends for the T-Notes and ABT/SPX through the Nasdaq’s strength from 1998- 2000 to make us wonder whether the only thing ‘real’ about gold prices is the perception of momentum.

Over the past couple of weeks grains prices have started to rally and out thought is that we could be looking at a fairly significant change in trend. Whether it will be focused on higher grains prices, lower gold prices, or some combination of the two remains open to debate. Still, this is one of the relationships that has caught our attention of late.

Equity/Bond Markets

We remain intrigued by the prospect of a major Japanese asset price rally. We admit that it hasn’t started as of yet and may not begin for weeks, months, or even years. Still... we love the way this has set up.

At right is a comparative view of the share price of Japanese bank Mitsubishi UFJ , the spread or difference between 30-year and 5-year U.S. Treasury yields, and the Japanese 10-year bond futures.

The argument is that two things have to happen to mark a bottom for the share price of MTU. The 30- 5 yield spread has to rise up towards or through 2% and the Japanese bond futures have to reach a price peak.

The first condition was met in early 2009. The problem has been with the second condition. In other words... a price top for the JGBs.

The thought is that once the JGBs turn lower we could be looking at a rally that will extend for a number of years until the 30- 5 yield spread finally declines back to the ‘0’ line .

Below right we return to a chart comparison that has graced these pages on a number of occasions in recent weeks. The chart shows the share price of Panasonic and the JGB futures from 2003. Below we feature the same comparison for the current time period.

In mid-2003 the share price of PC bottomed and turned higher even as the JGBs worked up to the cycle top. Our thought is that the equity market may not wait for the bond market to turn lower even though a sustained equity markets rally will require weaker bond prices. In 2003 PC ran up to the 200-day e.m.a. line as the JGBs worked through a ‘top’. This may explain why we keep running the chart below in the back pages as we fixate on the potential for PC to swing back above the moving average lines some time in the not too distant future.