by Kevin Klombies, Senior Analyst, TradingEducation.com, LLC


Monday, June 2, 2008

Chart Presentation: Big Charts

Of all the intermarket relationships that we follow the ones that we like the best are based on one market leading while another lags. These help to remove at least some portion of the randomness that the markets exhibit on a day-to-basis.

Over time the stock prices of large cap consumer names such as Coca Cola (KO) tend to trend inversely to commodity prices which, we expect, makes some amount of intuitive sense. The twist is that instead of lagging behind swings in base metals (i.e. copper) KO’s share price tends to lead by roughly six months.

Below we show KO and copper future with the charts shifted or offset by close to two quarters. The start of the rising trend for KO in mid-1988 preceded the peak for copper prices at the beginning of 1989. The lows for copper prices in late 1993 lagged behind a flat trend for KO earlier in the year while the start of a new rising trend for KO in mid-1994 preceded the peak for copper prices in early 1995.

Whether the ‘lead’ is exactly six months is somewhat moot; the argument is that trend changes for KO’s share price lead turns in the trend for copper prices by a couple of quarters so as long as KO is trending to the down side there is little chance of an imminent top for base metals prices.

We show the current situation on the next page.

The e stock price of KO bottomed around the start of 2006 which implied a cycle peak for copper prices around the middle of that year. So far, so good.

The question at present is whether the peak for KO at the start of 2008 marked the highs for the cycle. If so then by mid-year the trend for copper prices would turn upwards once again.

Our view or bias is that KO is consolidating the gains made through 2006 and 2007 and will push on to new highs which implies lower copper prices ahead. Our sense is that in the short-term this will require KO holding above the 55- 56 range and then resolving back up through the moving averages on the way back into the 60’s.

At bottom right we show a chart of Wal Mart (WMT) along with crude oil futures prices times the Australian dollar (AUD) futures.

The argument has been that WMT turns higher once the commodity trend turns negative and since both the Aussie dollar and crude oil prices represent the ‘commodity trend’ we have combined the two markets.

Obviously WMT’s stock price turned upwards more than six months ago which in some ways supports the idea that there is a leading relationship between the consumer and commodity sectors.

Below we shorten the perspective down to the last month or so. The chart compares crude oil futures, Wal Mart, and the ratio between Johnson and Johnson (JNJ) and FreePort McMoRan (FCX).

The point is that WMT began to trend upwards last month once oil prices reached a peak and this went with an increase in the JNJ/FCX ratio. In the very short-term- and by this we mean the last six or so trading sessions- there has been a minor swing back towards names such as WMT and JNJ in response to the decline in crude oil prices.

Kevin Klombies is a prolific writer and market analyst specializing in the commodity stock market and bond commodity market trading in the energy sector. He  graduated in 1980 from the University of Saskatchewan with a Bachelor of Commerce degree (Honours) in Finance/Economics.  Click here for full bio >>