Chart Presentation: Compelling

We are going to start things off today by returning to our comparison of Wells Fargo (WFC), Carnival Cruise Lines (CCL), the ratio between the oils (XOI) and broad U.S. equity market (SPX), and crude oil futures.

The idea for this argument came from the 1990 equity bear market. In early October of that year as energy prices spiked to a pre-Gulf War peak ahead of the real estate-driven recession of 1991 the equity markets bottomed and turned higher. Many of the financials- including Citicorp and the entire savings and loans sector- were seriously hamstrung and would not recover for some time but day after day and week after week the stock price of Wells Fargo climbed upwards.

With this in mind we set up a comparison that would be based on energy prices on one side- using crude oil futures and the ratio between the Amex Oil Index to the S&P 500 Index- and two equities that should be pressured lower by rising energy prices before snapping higher once the pressures eased. Originally we focused only on WFC although in due course we added Carnival Cruise Lines to the mix because of the marked similarity between its chart and that of WFC.

In any event the argument was that as energy prices pushed higher the stock prices of WFC and CCL should move lower. Fair enough. On the other side when WFC and CCL finally broke back above their respective 200-day e.m.a. lines this should mark the start of sustained energy price weakness.

In late January of this year and again in mid-March the stock price of WFC poked above the moving average line as CCL rose to just below its moving average line. The oils had been weakening with the XOI/SPX ratio moving lower so in these two instances the markets had a decision to make. Was it time to move away from the energy theme and back towards the financials and non-commodity sectors? Obviously not because crude oil prices rose from 87 to 110 from February into March and then from 100 to 120 from March into late April. In the process the stock prices of WFC and CCL were held below the moving average lines.

As recently as this past Friday WFC was back above its moving average line and for all intents and purposes it appeared as if something new was ready to begin. In response crude oil prices snapped 8 points higher which brings us to today. Is crude going into the 130’s? Perhaps but if WFC and CCL were to move above last Friday’s highs a compelling case can be made for lower instead of higher crude oil prices.

Last week we touched on the idea that consumer/tech stocks such as Apple (AAPL) and Research in Motion (RIMM) were trending very closely with the major commodity producers. Our argument was that if the collapse of the U.S. housing market truly marked the end of the consumer-driven theme which had, by extension, been driving capital spending in China then we should see some weakness in the share prices of AAPL and RIMM at some juncture. At right we show a comparison between copper producer FreePort McMoRan (FCX) and RIMM.

Another way to view this is through the chart below which compares biotech company Genentech (DNA) with Apple. While RIMM and FCX are trending together the charts of AAPL and DNA are virtual mirror images.

A third perspective is shown below right. The chart compares the U.S. Dollar Index (DXY) futures with the share price of another biotech- Amgen (AMGN).

The point here is that for one reason or another money has been moving away from the dollar and biotech and towards the fast growing consumer tech names along with the commodity sector.

The dollar bottomed in mid-March at the lows for Treasury yields and the share prices for many of the financials. Stocks such as Citigroup and Fannie Mae turned higher from mid-March as gold prices, the Swiss franc, and the CRB Index peaked. It is difficult to say that this marked ‘the’ trend change but at the very least it marked the potential for ‘a’ trend change.

The dollar was weaker yesterday following the collapse of Microsoft’s bid for Yahoo. One only has to take a quick glance at U.S. Dollar Index futures chart at bottom right to appreciate how insignificant the recent rally really has been given the number of times the DXY has popped above its 50-day e.m.a. line only to fail to new lows. Still, if we like the dollar here then we should also like the biotechs.