We have been working with the thesis that the markets would recover in a sequence that would begin with an improvement in U.S. employment, work through into a flattening out of U.S. housing prices, carry through into a period of relative outperformance by the banking shares which would, in turn, put upward pressure on U.S. short-term interest rates. This would go with a better trend for the U.S. dollar which would put downward pressure on commodity prices and help to push the markets into a trend that would benefit the users instead of the producers of raw materials. For good or for bad... this was our expectation.

Last week's Labor Department report of a payroll gain of 243,000 for January beat virtually all estimates. The game, it would appear, is truly afoot.

Below is a comparison between 3-month U.S. TBill yields and the ratio between the Bank Index and S&P 500 Index .

The argument has been that regardless of what the Fed says about the duration of its current 0 percent interest rate policy the process of turning short-term rates higher will begin with strengthening bank stock prices. We can see on the chart that a rising trend for the BKX/SPX ratio goes quite nicely with upward pressure on TBill yields. Of course the Fed won't raise the funds rate until TBill yields move above .25% but our view is that this will happen well in advance of the end of 2014.

The chart below features the ratio between Japanese bank Mitsubishi UFJ and the gold etf .

We have argued that there is a basic relationship between the trend for the laggard banks and that of gold prices. The weaker the banks the greater the downward pressure on interest rates and the lower the opportunity cost of owning a non-income producing asset such as gold.

We expect that the old trend will end with a new trend emerging once the MTU/GLD ratio bottoms and swings higher. As the fears and concerns regarding the banks ease yields should rise and as yields move higher gold prices should decline. The end result will be an upward swing the ratio between MTU and GLD.

Below is a comparative view of the Japanese 10-year bond futures and the ratio between Mitsubishi UFJ and the Nikkei 225 Index.

We have done this one on many occasions in the past but... given that it seems to be finding a bit of traction we are going to run it once again today. The argument- as usual- is that MTU outperforms the Nikkei when bond prices are in a declining trend. Obviously one would have to look very closely at the MTU/Nikkei ratio to truly argue that anything has changed but... the ratio is above the moving average lines, the 50-day e.m.a. has 'crossed' up through the 200-day, and the ratio had one of its best closes in more than two years last Friday. So... there is that.

Below is a chart of the U.S. Dollar Index futures minus the U.S. 30-year T-Bond futures.

The argument is that the 'old trend' was based on a weaker dollar and rising bond prices. The DXY was more than 20 points higher than the TBonds a decade or so ago and is currently close to 65 points lower. This 85-point swing has gone with a commodity-centric trend with an emphasis on energy and metals prices. If the 'old trend' relied on a weak dollar and rising bond prices then a 'new trend' will most likely include a stronger dollar, weaker bond prices, or both.

Below is a chart of the ratio between the S&P 500 Index and U.S. 30-year T-Bond futures.

Assuming that nothing much has changed since the end of the 1990's... which is not, of course, what we are assuming... there is still room for the rally to continue. The SPX/TBond ratio has room to rise up through 13:1 into 2013. The channel sequence has led to bottoms for this ratio every six years so we could, in theory, see equity markets strength into 2013 followed by yet another waterfall decline similar to 2008 into the end of 2014.