Our problem at the moment is that we still believe that the cyclical trend should be stronger over the next quarter or two. This is a problem because we find ourselves once again arguing with the bond market and, as we have written on these pages on quite a few occasions, that is not a comfortable position to be in.

We thought we would start things off today with a chart-based depiction of our current dilemma.

Below is a comparative view of the Nikkei 225 Index and the S&P 500 Index between 1987 and 1990.

Next we show the sum or combination of copper futures and crude oil futures along with the S&P 500 Index from 1998 into 2001.

The argument is that following a markets-related crisis- the kind that drives money away from risk- the cyclical trend remains positive for another 8 to 9 quarters.

The stock market ‘crash’ in 1987 was a significant crisis yet the cyclical trend as evidenced by the Japanese stock market did not reach a peak until the start of 1990. In other words we had a crisis followed a bit more than two years later by a major top for cyclical asset prices.

The Asian crisis roiled the markets in the autumn of 1998 as Long-Term Capital Management threatened the banking system. Aggressive easing central bank easing- reminiscent of post-crash 1987- helped to save the day.

The stock market pivoted upwards as the crisis eased followed a few months later by the commodity markets. The sum of copper and crude oil reached a peak during the fourth quarter of 2000.

Our point is that a financial markets crisis that engenders a significant policy response by major central banks has a tendency to elevate cyclical asset prices for a couple of years. Based on the two examples shown the top for the cyclical trend would be expected to be reached somewhere between 8 and 9 quarters following the crisis.

Equity/Bond Markets

Below we show the U.S. 30-year T-Bond futures and the Bank Index from 2008- 09.

In broad terms the 2008 ‘crisis’ ran for much of the second half of the year. More specifically, however, it began in the fourth quarter of the year with the ramp in long-term Treasury prices shoe-horned into the months of November and December.

Returning to our original point... this is an uncomfortable market. On the one hand... we believe that we won’t reach a peak for cyclical asset prices until some time close to year end or perhaps into the first quarter of 2011. On the other hand... the rising trend for bond prices that began at the start of this year’s second quarter suggests that cyclical growth is slowing.

For good or for bad our view is that the bond market will swing back to the down side and as this happens the cyclical trend will turn sharply positive.

Further below is a comparison between the SPX and the U.S. 10-year T-Note futures. Our thesis is that bond prices will swing lower. The reality is that bond prices are still trending higher. The offset to rising bond prices is, of course, falling equity and commodity prices.

So... how might this play out? In a sense ‘the markets’ were concerned about two major issues- the Eurozone crisis marked by the tumbling euro and credit tightening in China. The former was resolved in early June as the euro reached a bottom. The latter may be in the process of being resolved as Chinese growth slows to the point where the policy ‘foot’ can be lifted off of the brake. Our sense was that we might see a return to a stronger Asian trend through strength in copper futures prices. Below we compare copper with the 30- 10 Treasury price spread.