by Kevin Klombies, Senior Analyst

Monday, February 11, 2008

Chart Presentation: Trend Check

With the markets under so much stress of late we thought we would start off today with something fairly pedestrian. A moment of calm, perhaps, in an otherwise raging sea.

The chart below compares the stock price of Coca Cola (KO) with the Hang Seng Index from 1997 into 1998. On page 6 we have included a longer-term chart of KO starting around the end of 1993 and running through 1998.

The point is that KO’s stock price turned higher in 1994 and continued to rise into 1998 with the majority of corrections holding around the 50-day e.m.a. line although on a couple of occasions prices declined down to the 200-day e.m.a. line. In 1997, however, the collapse of the Hang Seng Index went with a deeper correction for KO that pulled it down through both moving average lines until the 50-day ‘crossed’ through the 200-day e.m.a.

The crossing of the 50-day through the 200-day moving average line is often called the ‘golden’ or ‘death’ cross depending on which way prices are moving. We have a somewhat different view because this event often leads directly into a price reversal.

The point is that the 1997 lows for KO were made around the time that the moving averages crossed. Weakness in the equity markets came from concerns about Asian growth instead of specific problems with KO so once the moving average crossed over the stock price returned to its original rising trend.

At bottom we show charts of Anheuser Busch (BUD) and Intel (INTC) from the current time frame.

It may be that both INTC and BUD are now moving into negative trends but our thought was that similar to KO being caught in an Asian tsunami in 1997 these two stocks have been sold off due to concerns in somewhat unrelated sectors. Notice, for example, that when the moving average lines for BUD crossed over last August it led directly into a price recovery back towards the highs.

If, similar to KO in 1997, one or both of these stocks are still in positive trends then the markets are going to swing them back above their moving average lines fairly quickly. Confirmation of the positive trend would then follow some months later when prices move on to new highs.


Equity/Bond Markets

Below we show a comparative chart built, from bottom to top, on the sum of copper and crude oil futures, the ratio of the stock price of Coca Cola (KO) to the S&P 500 Index (SPX), and the ratio between the Nasdaq Comp. and the SPX. The top chart shows the time frame from late 1993 into early 2001 while the lower chart begins in early 2004 and runs through to the present day.

We are attempting to show a sequence of sorts that begins with commodity price strength, works into a period of time that favors the consumer stocks, before eventually swinging into the tech sector. Let’s see if we can make sense of our chart comparisons.

The sum of copper and crude oil prices represents the leading edge of a commodity price rally. Once energy and base metals prices peak the markets tend to wander off in search of new things to bid higher in price.

The sum of copper and crude oil futures peaked in early 1995 just after the ratio of KO to the SPX began to rise. In other words in the late stages of what was clearly a commodity price rally the markets rotated over to some of the large-cap consumer names.

As the KO/SPX ratio pushed higher between 1995 and 1997 the sum of copper and crude oil traded flat to lower. The Asian growth theme began to weaken through 1997 leading eventually to a crisis in 1998 that marked the bottom for commodity prices.

As the commodity theme finally bottomed and turned higher around the end of 1998 concurrent with lower interest rates and aggressive additions of central bank liquidity the equity markets shifted over to the tech sector as the Nasdaq/SPX ratio exploded to the upside. The return to cyclical strength evidenced by the recovery in copper and crude oil prices through 1999 and 2000 marked the end of Coca Cola’s relative strength.

The point is that the sequence began with commodity prices, shifted into the more defensive equity markets sectors once the sum of copper and crude oil prices reached a peak, and then shifted once again to the cyclical tech sector once energy and metals prices along with Asian growth finally washed out.

In the current situation we can see that the sum of copper and crude oil futures prices peaked during the second quarter of 2006 and that this went with a rising trend for the KO/SPX ratio. This rotation represents one of the core arguments that we have been working on for the past several years- that once copper and crude oil prices peak the market will tend to shift relative strength over to the consumer defensive theme.

If history were to be kind enough to repeat then the sum of copper and crude oil (which closed very close to the highs at the end of last week) would continue to hold flat to lower as the KO/SPX moves higher. In due course the commodity theme would turn negative with the equity markets shifting focus over to non-commodity sectors including the airlines and autos as Asian growth weakens. Once the sum of copper and crude oil futures finally bottoms the next cyclical trend should focus more on the tech and telecom sectors pushing the Nasdaq/SPX ratio on to new recovery highs.