Chart Presentation: Pondering
We are fairly certain that we are supposed to concentrate more on providing answers than questions but from time to time we work up a chart comparison that makes us wonder how the future might unfold. We are going to start off today with just such a perspective.
From 1998 into the period extending from 2008 into 2011 the ratio between crude oil futures and the CRB Index rose by roughly a factor of 6 times. In 1998 the price of crude oil was a bit more than 5% of the value of the CRB Index while a decade or so later it was more than 30%.
When crude oil was at its lowest point relative to the CRB Index in 1998 the share price of Ford was close to 3% of the S&P 500 Index. Ten years later it had declined to less than .5%. As crude oil gained by 6 times relative to the general commodity market the share price of Ford declined to 1/6th of its relative strength when compared to the broad large cap stock market. Coincidence? For reference the chart is shown on page 6.
Below is a chart of Ford from 2000 through 2002. Below right is a chart of the ratio between crude oil and the CRB Index starting in October of 2010. We are comparing Ford in 2001 with the crude oil/CRB Index ratio in 2011.
The premise is that the markets- to some extent- create their own reality. If the energy theme loses momentum then money will move away from it towards those sectors, regions, and themes that offer the potential for rising prices.
What if... the crude oil/CRB Index ratio follows the same basic path into 2012 that Ford's share price did into 2002? Would that be perceived as a positive or a negative? Would a material decline in the relative price of energy cause or reflect a major slow down in global growth wreaking havoc on the major equity indices or would it serve to provide the spark for the energy ‘user' industries that have been under rather severe pressure for more than a decade? After years of rising commodity prices and continued outperformance by the oil and gas stocks is it even within the realm of the possible that these sectors are fading back into the investment shadows?
Equity/Bond Markets
Commodity prices peaked at the start of the 1980's and declined for 20 or so years until a bottom was reached in October of 2001.
The Japanese stock market peaked in 1990 and has declined for more than 20 years. The argument has been that the Nikkei 225 Index could swing back to the upside during the final quarter of this year. The Nikkei today may be similar to the CRB Index in late 2001.
Below is a comparison between the CRB Index and U.S. 30-year T-Bond futures from 2001-02. The key here is that the CRB Index bottomed as bond prices reached a peak.
Next we show the Nikkei 225 Index and the U.S. 30-year T-Bond futures from the current time frame.
Whether the Nikkei has already made a low or will do so later this quarter is largely a function of the trend for the bond market. As long as the TBonds are pushing higher there will be pressure on all of the various cyclical sectors so the first test of our thesis will be made once the TBond futures start to trade back to the down side.
Now let's toss in another comparison based on the final quarter of a ‘1' year. Below we show the ratio between Citigroup and Wells Fargo from the current time frame and from 1991.
The cyclical trend began to improve during the fourth quarter of 1991 as the C/WFC ratio pivoted back to the upside. This marked the beginning of a broad recovery in the laggard banks that had been hamstrung by the 1991 recession and real estate price collapse.
The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.
Posted-In: charts Commodities Crude OilMarkets Trading Ideas
