While we tend to focus on trend changes instead of the trends themselves the argument would be that a trend is a trend until it changes. As we approach the end of this year’s second quarter we thought this would be an appropriate time to show a few of the relationships that are defining the current trend.
Belowis a comparison between the ratio of crude oil futures prices to natural gas futures prices as well as the ratio between gasoline and heating oil futures.
While crude oil futures prices did not turn higher in earnest until February the positive energy price trend began to form at the end of last year. Through the first six months of 2009 crude oil prices have risen consistently relative to natural gas prices while gasoline futures have been stronger than heating oil futures.
We have argued in the past that a strong oil/gas ratio typically goes with foreign rather than domestic growth so with the markets focusing on the prospect of China dragging the rest of the world out of its recent malaise it makes sense that the crude oil/natural gas ratio has been stronger.
The gasoline/heating oil ratio tends to reflect consumer versus industrial demand. This ratio doubled from the November lows to the May highs.
Below is a chart of copper futures and the price spread or difference between 30-year and 10-year U.S. Treasury futures.
Copper prices turned higher around the start of the year as Asian demand led to a decline in copper inventories on the London Metals Exchange. While some would argue that shifting copper inventories from London to Shanghai is something of a zero sum game… it has been our observation over the years that copper prices tend to swing with changes in LME inventories.
As copper and energy prices have risen the yield curve has steepened as the spread between long-term and short-term Treasury yields has widened. This shows up as a declining 30-10 price spread. The point is that as long as crude oil is stronger than natural gas, gasoline is rising relative to heating oil, copper prices are trending upwards, and the long end of the bond market is declining in price… the trend has not changed.
Beloware two chart comparisons between the share price of Coca Cola (KO) and the Philadelphia Gold and Silver Index (XAU). The top chart runs from 1987 through 1992 while the lower chart covers the time period from mid-1993 through mid-1999.
During the late 1980’s through the 1990’s there were two periods of time extending for 4 to 5 years that included a steadily rising trend for the share price of KO. The first began with the peak for the gold miners in 1987 while the second commenced following the top for the gold stocks at the start of 1994.
As Coke trended higher following the peak for the XAU in 1987 the gold miners worked through a second period of strength leading to a top for the index in early 1990. The eventual end for KO’s positive price trend occurred a couple of years later in 1992.
The same thing happened last decade as the gold miners took a second run right in the middle of Coke’s stock price rally in 1996. Consistent with 1987- 1992 the gold mining sector made a peak around the start of Coke’s positive trend, a second peak roughly in the middle of the trend, and then a major bottom in 1998 as Coke reached its final top.
Below we show a chart of Coca Cola and the XAU from mid-2005 through the present day. The argument is that a rising trend for KO should follow a peak for the XAU. That occurred back in early 2006. If history were to repeat there would be a second bout of strength for the gold miners a couple of years later consistent with the highs for the XAU during 2008. If history were to continue to repeat one could argue that KO’s upward price run would continue well into 2010 as the gold miners moved back to a cycle bottom which would, in turn, mark the start of the next commodity bull market.
