by Kevin Klombies, Senior Analyst TraderPlanet.com
Wednesday May 23, 2007
Chart Presentation: Cyclical
We wanted to go over the ‘cyclical’ argument one more time before setting it aside. We may be guilty of flogging the proverbial dead horse but we do feel the need to make this point as clearly as possible so that we can move on to new topics and perspectives.
We show the Baltic Freight Index (BFI) and the ratio between the Amex Oil Index (XOI) and the S&P 500 Index (SPX).
In a sense ocean shipping rates (BFI) represent a non-levered and unspeculative view of the health of global trade. We have argued that if freight rates are strong and rising the trend for cyclical growth is also positive.
The BFI turned upwards in 2002 just ahead of the bottom for the equity markets and continued to rise into early 2004. From mid-2002 into the end of 2003 the ratio of the oils (XOI) to the broad market (SPX) declined. In other words there was a strong cyclical growth trend even as the energy theme underperformed.
Towards the end of 2003 the oils kicked back into gear as the XOI/SPX turned upwards and through into mid-2006 ocean shipping rates basically declined as the energy theme dominated.
The idea here is that similar to 2002 the oils began to weaken relative to the SPX in mid-2006 as ocean freight rates once again began to escalate. From this point of view the spring of 2007 is somewhat similar to the spring of 2003.
At bottom we show charts of Cisco (CSCO), Intel (INTC), and the ratio between the BFI and crude oil futures.
The ratio bottomed in 2002 and rose into early 2004 and then bottomed once again in 2006 before turning upwards into 2007. In May of 2003 after rallying upwards in late 2002 the stock prices of CSCO and INTC broke to new recovery highs.
From May 2003 into December 2003 when the XOI/SPX ratio finally bottomed and ocean freight rates reached a peak the equity market theme included a positive trend for tech and telecom. Put another way in the seven years since the peak for the Nasdaq the only time that one would have made any real money by owning Intel would have been during 2003. The argument is that we should see something similar this year.
We had the sense yesterday that all the trends were in the process of changing. The only problem was that it was a ‘Tuesday’.
Week after week the markets have gone into the Wednesday energy inventory report and then bid the price of gasoline futures highs through Thursday and Friday before settling prices back to basically neutral on Monday and Tuesday. The inventory numbers are then released and the whole process is repeated. From that perspective some weakness in gasoline and crude oil futures on a Tuesday is not all that important.
However… when airlines like AMR, Continental (CAL), and JetBlue (JBLU) all pop 5% to 6% we start to take notice. This is the sort of price action that should mark the turn lower in energy prices. When Japanese stocks like Mitsubishi UFJ (MTU) also jump around 5%… our interest is indeed piqued.
The first page argument regarding cyclical growth, ocean shipping rates, and the relative strength between the oils and techs grew out of the initial argument that in 2003 Japanese stocks like MTU and Matsushita (MC) ground inexorably lower into the end of April and then mysteriously pivoted upwards in May. Our thought was that the chart from 2003 (at top right) is really quite similar to the chart in 2007 (below right) for these two stocks.
Below we show biotech company Genentech (DNA) from 2003 as well as from the current time period.
In May of 2003 stocks like Intel and Cisco broke to new recovery highs. Just before this happened the trend reversed upwards for Japanese names like MTU and MC. Towards the end of May DNA’s stock price gapped sharply higher as the biotech theme came to life. In other words the argument was that some time around… right here and right now… all the trends were supposed to change. If yesterday hadn’t merely been a ‘Tuesday’ we might have found reason to feel encouraged.