by Kevin Klombies, Senior Analyst

Friday, May 23, 2008

Chart Presentation:Crude Oilvs. The 2000 Nasdaq



Equity/Bond Markets

The points that we were trying to make through the rather large comparative charts above were as follows: First, if we take the Nasdaq comparison literally then the cycle peak for crude oil would be made some time in June. Second, even if we accept it ‘generally’ then the charts still argue thatcrude oil futureswould have to break below the rising 50-day e.m.a.- at minimum- to turn the trend. This means thatcrude oil pricescould hit 117 today and still be in a rising and positive trend.

Below are charts of crude oil futures, the S&P 500 Index, U.S. home builder Beazer (BZH), and biotech giant Genentech (DNA).

It often takes a market around two years to ‘clear’. Time and time again we have watched a stock or sector rise to the clouds on a story and some good old fashioned trend-following momentum-based buying. Bearish investors wade in on the short side only to get blown out at successively higher levels until finally… the price breaks. In no time at all the price has fallen so far that it seems that it is too late to go short but, as mentioned, it often takes a market a good two years to get to a sustainable bottom.

When crude oil futures turned lower at the start of 1997 the trend was negative until early 1998. When the S&P 500 Index (and Nasdaq) broke sharply in the fourth quarter of 2000 the lows were not reached until the fourth quarter of 2002. As for the home builders… the trend has run long enough to suggest that a bottom has been made while the biotechs should also be ready to mount some form of recovery through the second half of this year.

10-year U.S. Treasury yields snapped back up towards 4.0% yesterday hitting a high just under 3.96% and ending around 3.92%.

When 10-year yields are trending higher the Nikkei tends to outperform the S&P 500 Index. At present the Nikkei is just below 14,000 while the SPX is equally close to 1400. If yields are rising then the ratio should resolve up from 10:1. Thestock priceof Mitsubishi UFJ (MTU) tends to do well when Japanese 10-year (JGB) bond futures are declining. After breaking rather impressively lower this week the JGBs ended just below 135 yesterday.