by Kevin Klombies, Senior Analyst TraderPlanet.com
Thursday, February 28, 2008
Chart Presentation: Coke/Copper
In yesterday’s issue we showed the relationship between Coca Cola (KO) and copper futures and argued that the cycle peak for copper prices in the spring of 2006 leading into a real estate-driven equity market decline in the first quarter of 2008 was virtually identical to the copper price peak in early 1989 and the equity ‘bear’ through the third quarter of 1990. We show the charts below.
The ratio of Coke to copper (charts below) turned lower into August and September of 1990 as copper prices recovered and then turned upwards just ahead of the new equity ‘bull’ in October. Our point is that adjustments in relative prices to date remain consistent with the idea that the stock market should be substantially done with its correction by the end of next month with better days to come once the Coke/copper ratio pushes back above its moving average lines.
Below we have included a chart comparison of, from bottom to top, Canadian forestry company Canfor (CFP on Toronto), U.S. home builder Beazer (BZH), Bear Stearns (BSC), and finally copper producer FreePort McMoRan (FCX).
Along with lumber prices the forestry stock peaked around the end of 2004 which was somewhat odd given the rampaging U.S. real estate market. However a year later the home builder stocks peaked and turn lower which was also somewhat strange given that we were now being inundated with home reno and home ‘flipping’ television shows. Another year later- around the end of 2006- U.S. financial stocks levered to themortgage marketsfinally peaked and turned lower and finally a year after that the base metals stocks reached cycle peaks.
Aside from pointing out that the equity markets have been selling off one sector after another each year we wanted to make a small observation. If the forestry sector was the first group to turn lower in the real estate-oriented rotation then does it make much in the way of sense to be buying the home builders, financials, and miners if the forestry stocks have not turned higher first?
We understand that some very ‘smart’ money has been moving into the forestry stocks but fundamentally most the Canadian companies are on life support as lumber prices remain ‘low’ while the Cdn dollar pushes higher. Intermarket-wise the key is the direction of the Cdn dollar futures. Notice on the chart below right that once the CAD held support on the 200-day e.m.a. line and then started to rise CFP’sstock pricewent into a dive.
We have a number of ‘lines in the sand’ that we are using to tell us when we should get even more positive on theequity markets and several of them are based on the trend for long-term U.S. and Japanese bond prices. The chart below shows that the TBond futures are still holding support while Micron (MU) pushes higher. The TBonds below 115 with the JGBs through 137 would definitely support the argument that the techs and financials will continue to move up from the January lows.