The ‘decade theme’ is based on the idea that the markets keep repeating similar trends from decade to decade. On the face of it this would mean that getting a handle on ‘the trend’ should get easier since we know what is coming but… the markets do an admirable job of making each and every time period feel wholly unique.
When we delve into the ‘decade trend’ we tend to argue that there are broad similarities even though from decade to decade the cast of characters seems to change. One time around cyclical strength shows up through rising commodity prices while on the next pass we might end up in a tech bubble.
The charts just below make a rather intriguing case because instead of comparing apples to horse shoes we are actually comparing apples to apples for a change. We are comparing two details from the trend that ran from 1986 with the same two details from 2006 to the present day.
Next is a chart comparison between the ratio of Citigroup (C) to Wells Fargo (WFC)- representing the laggard banks compared to the leading banks- and the ratio between the share prices of Coca Cola (KO) and Schlumberger (SLB) from 1986 into early 1994. Below right is the same comparison starting twenty years later in 2006.
One might ask how we come up with stuff like this. The answer is, of course, that we spend far too much time fiddling with charts and chart comparisons.
The ratio between C and WFC peaked during 1986 and 1987 while the Coke/SLB ratio was flirting with the .5 level. Put another way when the laggard banks peaked relative to the more stable leading banks the price of Coke was about one half the price of oil service company SLB.
By the end of 1991 the ratio between C and WFC had fallen all the way down to 1:1. As this ratio reached a bottom the share price of Coke had climbed so that it was very close to that of Schlumberger. From there the KO/SLB ratio continued to rise along with the C/WFC ratio.
The point? Here we are at the start of 2012 with the KO/SLB ratio now close to 1:1 while the C/WFC ratio has started to rise from around 1:1. If history were to repeat the next 12 to 24 months should go with relative weakness by the oils (i.e. a rising KO/SLB ratio) and an enthusiastic recovery for the laggard banks (i.e. C/WFC ratio).
Below is a chart that we have run in the back pages a few times in recent weeks. It compares the trend for Biogen (BIIB) with that of Chesapeake (CHK).
The argument is that the energy trend has been bearish for almost a full year with offsetting strength showing up in the biotech stocks. An owner of CHK might think that we are mired in a bear market while those long BIIB feel somewhat more upbeat about the equity market’s trend.
Next is a comparison between crude oil futures and the ratio between the pharma etf (PPH) and the Amex Oil Index (XOI).
This chart makes the same basic case over the same period of time. The pharma stocks have generally been outperforming the large cap U.S. oils suggesting that crude oil has been in some kind of price down trend since the end of last year’s first quarter.
Shifting focus to the here and now… we present a chart of the ratio between crude oil and the CRB Index and… the ratio between Canadian airline WestJet (WJA on Toronto) and the S&P/TSX Composite Index (large cap Cdn stocks).
Within a broad price decline energy prices rallied from August of 2011 into year end. The offset to this was rather sharp downward pressure on the autos and airlines which resulted in a steep decline in the WestJet/TSX Comp. ratio. Notice that trend is turning rather rapidly away from the energy sector resulting in an upward pivot in relative strength for the airline shares.
