Chart Presentation: The End of the Quarter

In general we tend to look for indications of a change in trend around the end of the third week in the first month of a new quarter. In other words around the 22nd to the 25th day of next month. On the other hand there is the possibility that the juggernaut commodity trend could break as early as this week so we thought we would return to a chart comparison that supports this eventuality.

The reason that trend changes tend to occur late in the first month of a new quarter is that this is when the bulk of the major quarterly earnings reports are due. Between now and mid to late July the markets will be focusing on those things that have already happened while after the numbers are reported the focus will shift over to the upcoming quarter.

In any event many months ago we started to show comparisons between crude oil futures and the Nasdaq Composite Index into the cycle peak in 2000. The idea was that the trends were so similar that if history were to repeat almost exactly we would see a peak for energy prices this year some time late in the month of June. In other words… right about now.

At top right we show the Nasdaq Comp. from July of 1999 through May of 2000. At bottom right is a chart of the CRB Index from October of last year to the present day. We are using the CRB Index instead of crude oil or heating oil simply as a change of pace.

In a recent issue we commented that strange things can happen during the final few days of a quarter. Markets in a rising trend can go almost parabolic through the final week so, all things being equal, we should expect commodity prices to power upwards until some time in July.

The 2000 Nasdaq, however, was an exception to the tendency. We imagine that traders expected the Nasdaq to push to new highs into the end of March so that they could maximize returns for the quarter before moving on to something new. During the final week of March the Nasdaq began to weaken to the surprise of many and intraday on the first trading day of April the index had lost a whopping 20% of its value.

The point is that money expects the commodity trend to hold into July but given that this is a Fed meeting week and given that the commodity trend has been feeding off of a weaker dollar… almost anything could happen between this Wednesday and early next week.

The chart below shows a relationship that is so curious and, we imagine, so coincidental that we hesitate to even include it. On the other hand we are rather partial to odd chart relationships…

The chart compares heating oil futures and the stock price of Merrill Lynch (MER). The argument is that the financials and energy prices are working as an offset with weakness in the banks and brokers feeding into strength in the commodity sector.

The detail that even we found odd is how tight this relationship has been. In the summer of 2006 heating oil futures were at 2.00 (shown as 20000 on the chart) with MER at or near 75 so the product of the two was ‘150’. In January when heating oil declined to 1.50 the stock price of MER was very close to 100 which (1.50 times 100) totalled up once again to 150. Last autumn when heating oil reached 2.50 the stock price of MER was 60 which gave us 150 and this month as heating oil reached 4.00 we can see that MER was very close to 37.50. 4.0 times 37.50 equals, of course, 150.

The quick point is that as long as heating oil futures hold below 4.00 the stock price of MER seems reasonable at current levels..

Quickly… the chart below right shows the U.S. 30-year T-Bond futures and the sum of the Fed funds target rate added to 3-month eurodollar futures. The idea was that when the sum rises above 100- as it did earlier this year- the bond market is at a price top. The problem is that the sum has fallen so quickly that it now looks as if long-term Treasury prices are close to being as attractive as they were back in late 1999.

Below we show copper futures and India’s Bombay Stock Exchange 200 Index. Copper prices tend to move inversely to bond prices so if copper were to follow the Bombay equity market and break to new lows it would certainly support the idea that bond prices are set to move higher.