by Kevin Klombies, Senior Analyst

Tuesday, June 26, 2007

Chart Presentation: NUE

The U.S. equity markets turned higher at the end of the second quarter last year on falling energy prices and rising bond prices. This theme dominated into the end of the year before reversing back to a stronger energy/weaker bond trend. Since the markets tend to change trends around the start of a new quarter we could very well be setting up this week for something new and different.

In yesterday’s issue we showed that the stock price of steel maker Nucor (NUE) began to lift in the autumn of 2000 as the dominant cyclical trend- tech and telecom- turned negative. Using a shorter-term perspective on the chart at top right we can see that Cisco (CSCO) began to decline around the start of September 2000 before breaking down through the 200-day e.m.a. line as the third quarter drew to a close.

The chart shows that NUE remained negative through September and then began to lift in October as the markets shifted to a new quarter and a new trend.

The chart below compares NUE today with the stock price of Japan’s Mitsubishi UFJ (MTU).

The chart shows that NUE began to decline at the start of June so, in a sense, the price action is similar to that of CSCO given that both turned lower with one month left in the quarter.

If MTU were to trade in a manner similar to NUE back in 2000 then it would trend lower into the end of the quarter and then steady out as we move into July. Notice that NUE is now flirting with the 200-day e.m.a. line in a manner reminiscent of CSCO in late September of 2000.

This analysis isn’t confined to Japanese banks like MTU because we could just as easily have chosen something like the biotech sector for the comparison. The idea is that the end of one trend marks the start of another so that those sectors that have been left behind or pressured lower by the sheer strength and momentum of stocks like NUE aren’t going to swing upwards until one or more positive sectors turn negative. Obviously more work has to be done before this has a chance of working out but the deeper NUE’s stock price gets below the 200-day e.m.a. line the more we are going to like this argument.



Equity/Bond Markets

One of the strongest stocks on the board yesterday was General Motors (GM). Any time that GM starts acting like a relative strength leader we are inclined to run one or more chart comparisons as an update.

We recall commenting back in January of 2006 that the hard trade is often the best trade and at the time the hardest trade of all was to go long GM. Strangely enough that actually worked out quite nicely given that GM’s share price has now doubled in the interim.

The chart at top right compares GM and the CRB Index from 1995 into 1999 while below right we feature the same comparison from 2005 forward.

We have argued that there are some intriguing similarities between the mid-1980’s, the mid-1990’s, and the mid-2000’s. The idea here is that the CRB Index peaked in May of 1996 and then again in May of 2006. In both instances the top for the CRB Index went with the cycle bottom for GM.

Notice that through 1996 and 1997 the CRB Index was essentially trending flat as metals prices, grains prices, and energy prices took a turn running higher. The CRB Index chopped back and forth through the moving average lines for a considerable length of time before finally breaking to the down side towards the end of 1997. Through this time frame GM made a number of sharp ascents followed by corrections back to or through the moving average lines until it finally reached a top in early 1999 as commodity prices bottomed out.

From our perspective the weakness in the CRB Index in late 1997 was a function of the break lower in the Hong Kong stock market. The chart comparison below shows that the last rally up through the 200-day e.m.a. line by the CRB Index occurred into early October and then as the Hang Seng ‘crashed’ to indicate that the Asian growth theme had turned negative the trend for commodity prices turned negative and remained that way for approximately the next 18 months.