by Kevin Klombies, Senior Analyst

Friday, April 4, 2008

Chart Presentation: The Ideas of March

In the Roman calendar the ‘ides’ marked the approximate middle of the month but the term is more generally associated with the month of March given that Julius Caesar was assassinated on that day. In more recent times the ‘ides of March’ tends to reflect some form of impending doom. Whether this is an appropriate reference to start things off today is open to debate but we thought it worth the effort all the same.

We were thinking more of changes in the trend than ‘doom’ per se when we set up the three charts at right. The reference to the ides of March had more to do with the argument that in recent years the dominant trend had died a Caesar-like death in this month and less to do with actual tragedy. Of course ‘tragedy’ in the markets tends to be a reflection of which side of the trend you are on because, as we have suggested in the past, there are no good or bad days in the markets for traders- only days when one is right with the trend and all the other days when one feels as if a bus just backed over your chest.

The top chart shows the Nasdaq Composite Index through the peak in March of 2000. The idea is that the Nasdaq reached a cycle top in March so, from that perspective, the trend change was negative for those long techs and telecoms. On the other hand when the Nasdaq finally turned lower it marked the start of a rising trend for a number of previously negative sectors including- chart on page 4- the Canadian banks.

The middle chart shows the ratio between the CRB Index and the S&P 500 Index. This ratio depicts the relative strength between commodity and equity prices. Similar to 2000 the ratio rose to a peak into March before turning back to the down side. In this instance the end of one trend and the start of another marked a new equity bull market which, we suppose, represented ‘doom’ for those on the short side.

The bottom chart features the CRB Index/S&P 500 Index for the current time frame. The argument is that the peak for this ratio last month may well have represented the third major ‘March’ trend change. Similar to 2003 the markets are making an attempt to lift equity prices while downward pressure on commodity prices is building. Our sense is that this might well be less of an equity ‘bull’ than a commodity ‘bear’ but that was anything but apparent in the trading yesterday as many of the mines and metals moved nicely higher along with commodity currencies such as the Canadian dollar.




Equity/Bond Markets

Below is a chart comparison of two Canadian stocks traded on the TSX- WestJet (WJA) and gas producer Duvernay (DDV). We have shown both on a number of occasions in the past and for a period of time towards the end of last year and into 2008 we showed DDV quite often to help represent the broader natural gas theme.

Through much of the second half of 2007 the markets very much liked the growth potential of WestJet (Canada’s answer to something like SouthWest Airlines a few years back) while money moved out of the natural gas sector. Even as WJA reported one monthly load record after another (WJA has increased the number of passengers on its planes for 15 consecutive months) the trend shifted as the gas stocks came back into favor and WJA tailed lower.

Our point is that yesterday- and it was certainly only ONE day- we had the sense that something new might be brewing. WJA took a run at its down trending resistance line (just over 19) while DDV was lower on weak natural gas prices. It is difficult to dig a trend change out of one day’s trading but if this continues it could well mark the end of the recent rally in the energy sector.

At bottom right we show crude oil times natural gas futures and then compare this to the gold etf (GLD). The energy trend is made up of both crude oil and natural gas and it goes with the broader commodity trend that has lifted gold prices.

To add an element of stress to our work the stock price of copper producer FreePort McMoRan (FCX) was sharply higher yesterday. We show this along with the World-ex.USA Index/Dow Jones Industrial Index ratio below.

Both the ratio and FCX are trending inversely to the U.S. dollar. If the trend has changed then the markets have to find a reason to support the dollar and reverse the strength in copper prices… very soon.