by Kevin Klombies, Senior Analyst

Wednesday, April 16, 2008

Chart Presentation: From Walmart to Copper

We are going to take a bit of a leap in logic today as we tie together the trend for Wal Mart (WMT) with that of copper futures prices.

Below we show WMT along with China’s Shanghai Composite Index. We have argued for some time that WMT tends to trend in the opposite direction of the Chinese equity market so as the Shanghai Comp. ripped skyward from early 2006 into late 2007 the trend for WMT was flat with resistance around the 51.50 level.

When China’s equity market turned lower in early January the stock price of WMT began to lift. In early March WMT began its push through the 51.50 resistance level as the Shanghai Comp. broke down through support close to 4100.

Our argument yesterday was that even in the short-term this relationship has held quite nicely so if WMT were to break to new highs it would indicate that there was still downward pressure on the Shanghai Comp. that could lead to a break below the early April low around 3300.

Turning to the chart at bottom right we compare the Shanghai Comp. with copper futures.

Through late February and into early March the Shanghai Comp. held above the 4100 level as copper futures prices pushed up from 3.80 to 4.00. As the Chinese market began to weaken copper prices turned lower before eventually finding support in the 3.50- 3.60 range last month.

The most recent push from 3.80 back to 4.00 was almost identical to the February- March rally and in both cases this occurred as the Shanghai Comp. held a short-term support line.

Our point is that WMT moving to new recovery highs yesterday suggests the potential for the Shanghai Comp. to fail down through the 3200 level which, in turn, should increase pressure on copper prices. If history were to repeat copper prices would drop back to 3.80 and then test the rising 50-day e.m.a. line close to 3.75.

From Wal Mart to copper through the Chinese sharesmarket.


Equity/Bond Markets

April 14 (Bloomberg) — The good news aboutJapanese stocksis corporations are buying back more of their shares than ever before. The bad news is everyone outside of Japan is selling the same equity…

We like the Japanesestock marketbecause we are rather inclined towards ‘deep value’ stories. The problem is that ‘deep value’ is usually another term to describe a sector or theme that absolutely no one likes and usually for good reason. However…

The chart at top right comparescrude oil futuresdivided by the CRB Index with the Asia ex-Japan Index divided by the Nikkei 225 Index. In other words we are looking at the relative strength of oil compared to generalcommodity pricesand the relative strength of Asia ex-Japan with Japanese equities.

The simple point is that as long as crude oil futures prices are relatively strong… the Nikkei will remain relatively weak. Buying Japanese stocks may well represent the ‘hard trade’ but the caveat is that this is only going to work with lower oil prices.

At bottom right we show the Nikkei 225 Index divided by the S&P 500 Index and 10-year U.S. Treasury yields. Time and time again we have pointed out that the Nikkei tends to rise on both an absolute and relative basis when yields are rising and most recently yields have been falling.

In fact the key to almost everything over the next number of days lies with both the dollar and the bond market. On the one hand the Nikkei has been falling as the dollar and yields have declined but on the other hand this same intermarket combination has led to rising commodity prices.

The Nikkei/SPX ratio made a bottom in mid-March concurrent with- charts below- the low for 10-year yields and the U.S. Dollar Index. If the Nikkei is going to continue to strengthen then 10-year yields have to push upwards from 3.3% as the DXY holds support above 71.