by Kevin Klombies, Senior Analyst

Friday, October 26, 2007

Chart Presentation: Copper and Crude Oil

Immediately following are two charts of the sum or combination of copper and crude oil futures prices. The chart at top right shows the time frame through the ‘double top’ for commodity prices in 2006 while the chart below right is from 2007.

The sum of copper and crude oil reached a peak on May 11th of 2006 at the top for copper prices and then proceeded to make a second top on August 10th as oil prices peaked and turned lower. Our view was that the process of working through a ‘double top’ could be repeated this year.

The sum of copper and crude oil made the first peak in July and the second peak- so far- in October. Copper prices have declined just far enough to offset the recent strength in oil prices.

As shown yesterday our view is that commodity prices (CRB Index shown below) reached a major top in 2006 and are currently trading from channel bottom to channel top within a declining trend. Finding the exact top of the channel has been quite a challenge this year but our efforts will be aided substantially if the sum of copper and crude oil prices rolls over from current levels.




Equity/Bond Markets

We are probably going to do something about our page 4 stock list one of these days. The list was put together at the start of 2005 based on the thesis that these were the sort of stocks that could double into 2007. British Airways, DaimlerChrysler, and AG Edwards (recently bought by Wachovia) accomplished that feat and now McDonalds is getting closer (58.07 vs. 31.25). Coke is on the rise but like Pepsi it still has more work to do. Anheuser Busch can’t seem to get through the major resistance line at 54- 55, and Wal Mart- which was supposed to be the last to swing higher- remains under water. One of these days we will come up with a new list and, if history is any guide, we will be about one year ahead of the markets.

Below are two comparative charts featuring crude oil futures, the ratio between Caterpillar (CAT) and Pepsi (PEP), and the stock price of CAT. The chart above is from 2006 while the chart below is from the current time frame.

The page 1 argument was that commodity prices made a ‘double top’ in 2006 with copper peaking first and crude oil prices peaking three months later. At the peak for copper in May the stock price of CAT (along with the SPX) turned lower. The ratio of CAT to PEP declined as the cyclical sector weakened relative to the consumer stocks. Between early June and August the CAT/PEP ratio bounced along a support line as CAT’s stock price held around the 200-day e.m.a. line. Meanwhile crude oil prices continued to climb.

2007 has been virtually identical. CAT (and the SPX) turned lower when copper prices peaked back in July and the CAT/PEP ratio has been holding support as CAT chops back and forth at the moving average line. Meanwhile (once again) oil prices continue to rise. Now if we could just get oil prices to turn lower we could move on to a new topic.

Below is a chart of Alcan (AL). We want to emphasize something today that has almost nothing to do with Alcan and everything to do with the seasonal tendency for the world to appear absolutely bleak in October and amazingly positive the following May. Each year is different but often the seasonal trend is marked by major lows for the miners in October followed by peaks the next spring. The twist this year is that robust commodity prices are creating a sense of the end of the world in the financials.