by Kevin Klombies, Senior Analyst

Thursday, May 31, 2007

Chart Presentation: Biotech

A month or two ago we started to show and argue that the declining trend for Japanese stocks like Mitsubishi UFJ and Matsushita appeared similar to that of 2003. The idea was that at the end of April in 2003 the trend for both of these stocks turned from negative to positive and the rising trend continued through the balance of the year.

We then argued that the basic similarity between 2003 and 2007 was the strong cyclical trend that was exemplified by the powerful rise in ocean shipping rates (Baltic Freight (Dry) Index).

The chart above compares Genentech (DNA) with the BFI from 2003 while the chart below right shows the same comparison for 2007.

In May of 2003 the BFI started to turn lower and in response the cyclical theme of the markets shifted rather abruptly back towards the biotechs. DNA’s stock price gapped to the upside and simply kept pushing.

We are aware that while history has a tendency to repeat it also has a tendency to do so with a few unexpected twists. As we focus on DNA to see if it is ready to spring to life once again we can’t help but notice that another biotech name- Biogen (BIIB)- is starting to show a bit of life. BIIB has been swinging back and forth through the moving average lines so at minimum it is going to have to push above the 53 level to really capture our interest.




Equity/Bond Markets

In trading yesterday the stock price of Caterpillar rose about twice as much on a percentage basis as Coke (3.6% vs. 1.47%) and the Amex Oil Index was twice as strong (1.59%) as the S&P 500 Index (.8%). All of which simply means that the commodity markets recovery that began back in January remains intact.

Concurrent with the rise in the CAT/KO ratio is downward pressure on long-term Treasury prices. We show this on the chart at top right.

The chart below compares the CAT/KO ratio with the CRB Index while the chart below right shows the CRB Index and the ratio between the Amex Oil Index (XOI) and the S&P 500 Index (SPX).

The intermarket argument is that the longer the oils and basic materials outperform the broad market and big cap consumers like Coke the greater the pressure on long-term interest rates.

On the other side the home builders represent the real estate trend and as interest rates move upwards added negative pressure is placed on the housing market.

The point is that while there are a number of potential outcomes many of them are actually quite bearish. The better the commodity markets the higher interest rates move and the worse things get for real estate. On the other hand the main driver behind the bullish equity market trend over the past few months has been strong commodity prices and when this trend faltered in the spring of 2006 the SPX declined by roughly 7.5% (equivalent today to about 115 SPX points). We will continue with this thought on the next page.