Chart Presentation: 100 or 150?

One of the recurring themes that we have touched on over time has been the tendency for the markets to shift rather intensely from sector to sector every six months. We grant that at any given time any number of stocks or sectors may be rising or falling but there is typically one key or central idea that serves as the focus for capital flows.

This past January the natural gas sector began to trend higher. In general and over time the ratio of crude oil to natural prices tends to range from over 12.5:1 down to as low as 4:1 so from that perspective gas was ‘cheap’. We would have argued that this really meant that oil prices were expensive but, in any event, the end result was day after day and week after week of higher share prices for the major natural gas producers.

The chart at top right compares Chesapeake (CHK), Canada’s Duvernay (DDV), and the ratio between Caterpillar (CAT) and Coca Cola (KO). The point is that from January into June the trend was cyclical, it was commodity, and it was very much natural gas.

Our sense is that crude oil prices are getting set to make a 25 point move. Our problem is that we aren’t sure whether this is going to be up or down.

At bottom right is a comparison between crude oil futures and the ratio between Exxon Mobil (XOM) and Boston Scientific (BSX). In this example XOM represents the energy theme while BSX is used to show the general health care theme.

Over time the XOM/BSX ratio takes very wide swings as either the energy or health care theme dominates. We have argued in the past that once energy prices turn lower we would expect to see BSX do better. We have also made the point that the 200-day e.m.a. line for this ratio should serve both as support and a way to discern whether the trend has changed.

The argument today is that each time the XOM/BSX ratio has declined to the moving average line this year… oil prices have swung higher. This happened in early February, early April, and again around the start of May. Now we begin the month of June in the midst of an energy/natural gas theme with the ratio back to the moving average line. If history repeats the next stop for crude oil futures prices will be 150. If, on the other hand, 120 is broken then the next stop should be very close to 100.

Our above point was that the markets remain in a cyclical and commodity-driven trend. If this holds through the balance of the quarter then we could see 150 crude oil. When the equity market’s trend begins to turn negative one of two things tends to happen- either much stronger or much weaker crude oil prices.

At right we show a comparison between Apple (AAPL) and Genentech (DNA). We have been featuring this chart almost daily for the past while to show the way these two stocks have been moving in opposite directions. Yesterday DNA pushed upwards and, perhaps in response, AAPL turned lower.

In yesterday’s issue we touched on the argument that while the stock price of Coca Cola (KO) will tend to trend in the opposite direction of copper prices it is Coke that actually ‘leads’ at the turns.

Below we show KO and copper futures with the charts shifted or offset by six months. The point is that if KO is leading copper and KO’s share price is declining then by the second half of the year copper prices could be ready to move up above the 4.00 range.

However… we show the same comparison at bottom right from 1997 into 1999- once again shifted by six months. KO’s share price broke below the moving average lines in 1997 but by the end of six months (chart comparison on page 4) it had swung back to positive. If this were to happen this quarter it would likely be as a result of lower instead of higher crude oil prices through June which would in turn support the argument that the next stop for crude oil will be 100 instead of 150.