by Kevin Klombies, Senior Analyst,

We always seem to be struggling with the markets. We suspect that some of this comes from our tendency to focus on those relationships or arguments that have yet to work or, perhaps, are simply not working. When we get something right we tend to add it to the foundation for the next argument and then we move on. We try as best we can to avoid dwelling on those things that we have gotten correct because we are well aware of how humbling the markets can be. The bad news, we suppose, is that our work is more art than science while the good news would be that most of the today’s problems were created by those who believed that the rules of math and science distilled into complex computer models should always apply to the markets. Black swans anyone?

In any event… after all of that… we return to a chart-based argument that graced these pages on a number of occasions some months back that, for some unforeseeable reason, actually worked. At least so far.

Below we feature a comparison between the Nasdaq Composite Index from 1998 into late 2001 and crude oil futuresfrom May of 2006 to the present date. Both charts show the same ‘amount’ of time even though they come from different points in time.

The original argument was made some time back in 2007. It suggested that the trend for crude oil was so similar to that of the Nasdaq
that it was possible thatcrude oil priceswere going to drive higher through into June of 2008. We recall taking the comparison literally and arguing that this could mean a June peak even though history will show that the highs were made in July… but, for a macro-based argument, a month one way or the other is still very close to ‘dead on’.

Our view is that crude oil futures prices are going to resolve back down to or even below 50. What we are less certain of is the exact path that this correction will take. The Nasdaq, after all, spent months chopping back and forth through its moving average
lines following the initial break in the spring of 2000 so in theory crude oil could hold plus or minus 110 through the balance of this year. Still, the bigger issue from an intermarket perspective is not that oil pricesare going to hold or decline but rather that the peak- likely for years to come- is now behind us.



Equity/Bond Markets

On page 1 we compared crude oil futures into 2008 with the Nasdaq Comp. into 2000. The argument was once again that the highs for crude oil prices were reached around the end of this year’s second quarter and that it will be years before crude oil prices move above 150.

At right we show the Nasdaq Comp. and the stock price
of the Bank of Montreal (BMO) from 1999- 2001.

The argument is and has been that the banks bottomed at the very peak for the Nasdaq in 2000 so the lows for thefinancialsshould be set at the peak for crude oil prices this year. In a sense and with a bit of imagination that is almost exactly what has happened.

At bottom right we compare crude oil futures with the stock price of Wells Fargo (WFC). We usually use Japan’s Mitsubishi UFJ (MTU) for this argument but WFC does a better job for the time being of showing the expected trend.

At the peak for crude oil futures prices in July the trend for the banks should have turned positive. Six or seven crises later we can see that WFC made the appropriate pivot to the upside at the appropriate point in time. If history were to repeat the trend should remain positive well into 2009. We could also argue that as long as WFC is grinding higher the markets are ‘saying’ that the positive trend for commodity prices has come to an end.

Below we show an odd argument that we keep finding reason to return to. The chart shows crude oil futures and the ratio between Coca Cola (KO) and the S&P 500 Index (SPX).

Very quickly… when the KO/SPX ratio turned higher this ‘should’ have marked the start of a negative trend for commodity prices. Our point was that if the KO/SPX ratio breaks to new highs then crude oil futures prices are headed back towards 50.