Chart Presentation: Seven

For a change crude oil prices were stronger on Tuesday and somewhat weaker on Thursday. A small change to be sure but we will take what we can get these days.

The reversal rally in the S&P 500 Index kept the U.S. equity market just above the 200-day e.m.a. line. The day’s trading leaves the chart looking like a Florida hanging-chad but unlike ‘tops’ most fear-based bottoms start with an intraday reversal. What we did notice was the way the large cap consumer stocks were ‘bid’ most of the day. This is going to get REALLY interesting if copper breaks and closes below the August lows.

Some time back around 2002 we started arguing that the markets were following a somewhat similar pattern through each decade leading us to suggest that the equity markets should bottom out around the end of the third quarter. As usual we were early but, for a change, only by about 8 days.

We return to this perspective from different angles every now and then. One comparison that we have shown on occasion is based on the way the stock price of gold miner Newmont (NEM) peaked in early 1996 and early 2006.

The chart ‘detail’ that we found interesting occurred in 1997. At that time (in the face of falling gold prices) the gold miners lifted upwards as the Hong Kong stock market moved to a major cycle peak. The Hang Seng topped in August and then ‘crashed’ at the start of October in a very similar manner to the SPX in October of 1987. Hence our fascination with the notion that there is some connection between 1987, 1997, and 2007.

The charts at right show the product of the Hang Seng Index times Newmont. The top chart is from 1987, the middle chart from 1997, and the lower chart from 2007.

From this perspective one could argue that 1987 is a more relevant comparison and from a number of angles we would have to agree. The point, however, is that in the past Asian and gold-related equity prices have fared quite poorly late in the ‘7’ year. This time could always be different but it wouldn’t be too much of a stretch to suggest that there is the potential for a 50% ‘hair cut’ in both of these sectors. Our sense is that the trigger could well be weakness in copper prices.

The markets have been somewhat mixed this year although we suspect ‘bipolar’ might be a better word. On the one hand there are clear indications of a slowing economy with the very real potential for California to be already in recession. On the other hand much of the action has been in the cyclical stocks even as interest rates have declined.

Typically when interest rates are falling the stock price of Johnson and Johnson (JNJ) outperforms the S&P 500 Index. The JNJ/SPX ratio has recently turned higher in a manner similar to last year. The ratio has to hold above the 200-day e.m.a. line long enough for the 50-day e.m.a. to cross up through the 200-day and then the ratio has to go on to make new highs. Notice that this last detail was not accomplished in 2006.

The ratio between Anheuser Busch (BUD) and the SPX tends to trend inversely to the Canadian dollar. Three of BUD’s largest expenses are grain, aluminum, and gasoline (beer, cans, and distribution). Since Canada is a major provider of grain, metals, and energy perhaps this relationship actually makes intuitive sense. The BUD/SPX ratio is making yet another attempt to test the long-term trend line.

President Bush has his war against terror although Hillary Clinton recently suggested that he has waged a war against science and that, if elected, she would wage a war against cancer. Genentech is generally regarded as the preeminent company in the fight against cancer so our expectation has been that it should do well into the 2008 elections. So far the trend has very clearly favored the metals and miners.

We have argued on occasion that the non-commodity cyclicals tend to swing higher once the commodity cyclicals break below their 200-day e.m.a. lines. Below we show a combination of Caterpillar and Valero along with AMR. When the CAT+VLO combination broke the moving average line last August AMR turned upwards and remained positive until CAT+VLO swung back through the moving average line in late February. The chart suggests that we might need one more hit of bad news before a trend change can take place.