One of our views is that the shale gas theme represents one of the most important stories within the markets. Our argument isn’t that the story has come to an end- that might not happen for decades- but instead is that a new chapter appears ready to begin.

Below is a comparative chart of the Canadian dollar (CAD) futures and the ratio between the Natural Gas Index (XNG) and the S&P 500 Index (SPX).

The XNG/SPX ratio represents the relative strength of the natural gas stocks compared to the broad large cap market. The ratio turned upwards back in 2002 (just after the U.S. dollar began to decline post-Nasdaq implosion) before expanding by 3 to 4 times into 2011.

If we draw a trend line under the ratio the detail that stands out might be that the ratio has recently ‘broken below support’. To us this appears to represent a trend change as the money that had pushed towards the share prices of the finders of natural gas reserves starts to move away.

A comparison that comes to mind would be the tech and telecom sector post-2000. The bearish trend for the Nasdaq did not represent the end of the internet but rather the evolution of the trend from building infrastructure and bandwidth over to new and innovative uses for it. Put another way… Apple, Netflix, FaceBook, Amazon, and EBay all have one thing in common- they represent consumer-oriented uses of the bandwidth and infrastructure that was put into place during the heyday of the tech and telecom bull market through the 1990’s.

We mentioned that the XNG/SPX ratio began to rise after the dollar finally turned lower in 2002. Another argument would be that the XNG/SPX ratio is starting to roll over in response to the start of what appears to be a ‘stronger dollar’ trend.

The Canadian dollar bottomed against the greenback in 2002 and has trended higher over the past decade in a fairly similar path to the XNG/SPX ratio. From an intermarket point of view we would like to see the commodity currencies (Cdn and Aussie dollars) roll over to confirm the recent weakness in the share prices of the natural gas producers.

We will expand on this argument somewhat below.

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Equity/Bond Markets

First below is a chart of the U.S. Dollar Index (DXY) futures from June of 2001 through July of 2002.

Next is a chart of the sum of the Canadian and Australian (CAD plus AUD) dollar futures from June of 2011 to the present day.

The argument is that the start of the rising trend for the natural gas stocks began in 2002 as the U.S. dollar started to weaken. Our view is that the end of the relative outperforance for the shale gas stocks will go with U.S. dollar strength. One way to measure a stronger dollar is through weakness in currencies like the CAD and AUD.

The charts make for an interesting comparison. The U.S. dollar declined into September 2001 and then pushed upwards into the first quarter of 2002 before breaking trend line support in the month of April.

The sum of the CAD and AUD bottomed in September of last year and has recently trended higher through the end of the first quarter. The commodity currencies could to grind upwards for awhile longer but… the argument is that if, as, or when the support line is broken it will mark the end of the ‘strong energy price’ trend that has benefited the producers while ushering in the start of a new trend that should benefit those companies that find new and innovative ways to take advantage of plentiful and low cost domestic U.S. natural gas.

Below is a chart of the Nasdaq Composite Index from 1990 into 2003 as well as the Natural Gas Index (XNG) from 2002 to the present day.

The Nasdaq’s rising trend ran from 1990 into 2000. Almost exactly ten years in duration. The XNG began to rise in 2002 so an argument might be that it is ready to spend a few years consolidating the gains with the potential for a better trend developing some time in late 2014 or early 2015.

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