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


Thursday, June 5, 2008

Chart Presentation: Sequence

We start things off today with a chart comparison of copper futures and the cross rate between the euro and the Japanese yen from 2000 into 2001.

In past issues we have argued that copper prices tend to rise with crude oil and then turn lower a few months in advance of energy prices. Our objective today is to try to cobble together a sequence of sorts to help us struggle through the balance of this year.

The argument is that between September and October of 2000- in advance of the first rate cut by the Federal Reserve and concurrent decline in European short-term interest rates- two things happened. First, copper prices reached a peak and second, a major foreign exchange relationship pivoted or reversed.

The euro turned higher against the yen in 2000 and has held a rising trend right into 2008. Our view is that this may well be the one currency relationship that goes with or, perhaps, defines almost everything that has happened post-2000.

Below we show the combination of crude oil times natural gas (i.e. energy prices) and the stock price of medical products maker Boston Scientific (BSX). This chart covers the same time frame as the chart at top right.

In September and October copper prices peaked and the euro began to strengthen against the yen. In December into January energy prices finally reached a top as the equity markets rotated away from the commodity and tech-related sectors towards those sectors that would be helped by falling interest rates.

We are attempting to show a number of things here. First, copper prices began to weaken as a major currency relationship reversed. Second, energy prices remained strong for two or three months before finally following copper prices lower and as energy prices began to weaken stocks that had previously been ‘losers’ began to rise even as the previous cycle’s winners started to implode.

On page 2 we will apply this sequence to the current time period.

Below we show copper futures and the U.S. Dollar Index (DXY) futures. Below we feature a comparison between crude oil futures times natural gas futures, the stock price of airline AMR, and the stock price of biotech giant Amgen (AMGN).

We are arguing that the sequence should be similar even as the cast of characters changes.

Before pressing on we will segue quickly to the chart below of the ratio between the share price of Exxon Mobil (XOM) and Boston Scientific (BSX). For good or for bad this particular ratio has been the focus of our attention for much of the past year.

The ratio peaked in late 1993 as the oils reached a relative strength peak against the health care theme and then made a second top close to 7 years later at the end of 2000. We argued last year that this could well mean that the ratio was due to top out towards the end of 2007 which simply meant that for the next few years one would do better in BSX than XOM.

We also argued that following both of the previous peaks the ratio snapped back to 4:1- quickly. Obviously that has not happened as of yet this year... although we remain ever hopeful.

Our point today is that copper prices made what appears to be a cycle top through March and April concurrent with what appears to be a cycle bottom for the dollar. In other words we have a top for copper prices and a major trend reversal in the currency markets.

If the sequence from 2000 repeats then this should evolve after a couple of months into a peak for energy prices along with a number of sharp trend changes within the equity markets as winners become losers even as losers turn into winners. Instead of focusing on BSX we thought we would show two stocks- AMR and AMGN- that have been trending lower on dollar weakness and energy price strength. The only thing that we are missing here is actual weakness in energy prices although we should point out that through the final month of 2000 oil prices were weak while natural gas prices continued to climb.

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 >>