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


Thursday, July 17, 2008

Chart Presentation: Trend Check

July 16 (Bloomberg) — U.S. stocks rallied after higher- than-estimated profit at Wells Fargo & Co. sparked the biggest- ever gain in financial shares and a two-day tumble in oil prices brightened the outlook for transportation companies.

Goodness... we never would have believed that the markets could rejoice because crude oil futures prices were only 134. How times have changed.

Energy prices continued to decline and the equity markets snapped higher with much of the strength concentrated into those sectors that have fared the worst recently. Wells Fargo gained 32% while General Motors, Ford, and the Airline Index were all up 16% to 18%. Is this the turn? We admit that we have no idea but our sense is that things will be somewhat clearer on Friday after Merrill Lynch and Citigroup report quarterly earnings.

Below we show two comparative charts of Caterpillar (CAT) and the pharma etf (PPH). The chart is from 2006 while the other chart is from 2008.

From a number of perspectives 2008 is similar to 2006. The stock price of CAT peaked in May both years- reflecting the Sell in May and Go Away adage- while the PPH made a bottom in late June. If the balance of the year were follow the 2006 example the markets would favor the health care, consumer, and financial themes while eschewing the commodity cyclicals through into early 2009.

There are a few differences as well with the most notable being the action in the commodity markets. In 2006 the CRB Index peaked in May and then broke down through the 200-day e.m.a. line in August which helped broaden and extend the equity market’s rally. This year the CRB Index didn’t even bother to pause in May as it pushed on to new highs into the end of June.

Perhaps the detail that gives us the most encouragement comes from the phrase ‘into the end of June’. When markets drive higher or lower through the end of a quarter the action is quite often based more on maximizing the quarterly return on investment positions than actual fundamentals. Our sense is that the commodity markets remain at serious risk but even after yesterday’s break in copper, gold, and energy prices it is still much too early to call this anything more than a minor correction within a rising trend.

Below we show Genentech (DNA) and the ratio between Mitsubishi UFJ (MTU) and the gold etf (GLD).

We are showing this again because DNA started the day off strongly and then ended weaker. The stock pushed as high as 80.97 and then ended at 78.77. If DNA had closed nicely above 80 our conviction would have been that the trend was changing. It didn’t so we remain skeptical yet hopeful.

Below we show crude oil futures and the ratio between Exxon Mobil (XOM) and Boston Scientific (BSX).

The original argument (so many) months ago was that this ratio should snap back to 4:1 on the initial correction but as we can see it ran into support at the moving average lines and has traded flat through much of this year. The ratio clearly broke to new lows yesterday but we would have preferred to see this happen at the same time that crude oil futures moved below the 50-day e.m.a. line. We are obviously encouraged but not completely convinced.

Below we feature the ratio between the stock price of Caterpillar (CAT) and Coca Cola (KO).

The ratio rises when CAT is stronger than Coke and declines when Coke is stronger than CAT. Fair enough.

The point is that the ratio tends to change direction in the first month of a new quarter. Not always, of course, but when it does pivot that is usually when it does so. New trends tend to emerge around the end of the third week of the first month of a quarter so perhaps things will become a bit more clear next week after the bulk of the quarterly earnings have been released.

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 >>