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


Wednesday, July 30, 2008

Chart Presentation: Overview

July 29 (Bloomberg) — The dollar advanced to a one-month high versus the euro and the yen as a report showed U.S. consumer confidence increased this month, reducing concern the world’s largest economy may fall into a recession.

The currency rose earlier as Merrill Lynch & Co.’s plans to sell $8.5 billion of stock and liquidate bonds raised speculation Wall Street may have seen the worst of the credit crisis. A decline in crude oil prices helped push the euro lower versus the dollar.

Bit by bit the relationships that argue for a better dollar have turned positive while the key sector that benefits from a weaker dollar- commodities- has started to struggle. We will start things off today with a reprise of an argument that we made a week or so ago in an attempt to put the current position of the markets in some form of perspective.

At top right we show corn futures and copper futures from late 1993 through into the start of 1997. The argument is and has been that the grains rally in between the first peak for copper prices and the last or final peak.

At bottom right we had included the same chart from late 2005 to the present day.

The chart shows that the rally for corn futures began some time after copper futures reached an initial top in 2006. By mid-2008 we can see that corn futures were at a major price top at the same time that copper futures had pushed back up to the 4.00 level that marked the highs set back in 2006.

Obviously 2008 is not EXACTLY similar to 1996 but we like the comparison from a ‘broad brush’ point of view. In 1996 corn futures spiked back to new highs after copper turned lower but on an intermarket basis once copper broke support it was only a matter of time before corn prices followed to the down side.

Our view is that the CRB Index, copper, and grains prices have peaked for the cycle. Our view is that the equity markets are in the process of struggling to confirm the trend change and that the U.S. Dollar Index will resolve back up through 75. Our view is that our views do not and can not account for what the markets may or may not do if Israel were to launch a military strike against Iran.

The chart below compares the stock price of fertilizer producer Potash Corp. (POT) with the biotech etf (BBH).

As mentioned above we believe that the equity markets are in the process of confirming the trend change away from commodity price strength. The chart shows that biotech as a sector was ‘dead in the water’ from late 2005 into mid-2008 as copper prices pushed to a peak followed by strength in grains prices. The sharp rise in the BBH suggests to us that money has begun to rotate out and away from the commodity producers.

Another view is shown below using the Amex Natural Gas Index (XNG) and the share price of Johnson and Johnson (JNJ). The argument is that towards the end of this year’s second quarter money began to shift away from the theme that dominated through the first half of the year- natural gas and coal for example- and back towards sectors like health care. JNJ’s share price began to rise at the same time that the XNG started to falter.

Below we show Coca Cola (KO) and corn futures.

Corn futures prices peaked in the spring of 2007 around 4.40 and as corn traded below that level the stock price of KO began to rise. The chart shows that the peak for KO at the end of last year occurred as corn futures prices drove to new highs. Now that grains prices have begun to show indications of weakness we can also see that KO is making an attempt to dig in at or above the 50 level. As an aside... KO set up the Coca Cola Research Center for Chinese Medicine in Beijing last year and we wouldn’t be surprised if a line of new ‘herbal medicine drinks’ based on this work were announced during the Olympics. Just a thought.

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 >>