Sunday, May 6, 2007

Global Economies and Commodities

"When your neighbor loses his job it's a slowdown; when you lose your job, its a recession; when an economist loses his job, its a depression."


This is a chart of the Nasdaq Composite Index,with an indicator showing the moving average for the advance/decline line. This moving average is sloping down as prices go higher, showing that fewer stocks are making the gains in order to carry the index higher. Key this week will be Cisco Systems' earnings release Tuesday after the close, and the Federal Open Market Committee(FOMC) meeting Wednesday. These two events should be a pivotal point for the direction of the market. Expect most of the activity to happen after these events are out of the way later in the week.

This chart of the NYSE Composite Index is very similar to the Nasdaq. Fewer stocks are carrying the load as the indexes move higher. The stocks carrying the load are mostly larger-cap companies and those that have a percentage of their business outside of the United States. The weakness in the US Dollar makes the goods and services these companies provide cheaper because of the exchange rate. Below is a chart that compares the large-cap stocks to smaller-cap stocks.

The slope of the green line on the right side of the chart marks the out-performance of the large-cap stocks.

Below is a chart comparing the large-cap stocks in the United States to an index tracking international equities.

This shows that equities tied to international economies have been in an uptrend for a while and have out preforming the U.S. Market. One area that is always of interest to look at is the commodity sector/natural resources. The chart below compares the international equity market(EFA) to the Goldman Sachs Natural Resource Index(IGE). Since the February sell off related to comments China made about their economy and markets, commodities have been slightly stronger in relative terms.

If we take the oil segment out of the commodity index, it shows even greater strength. The chart below shows the relation between the Goldman Sachs Natural Resource Index(IGE) and the U.S. Oil market ETF(USO).

This clearly shows that commodities other than oil are out performing and a leading group over all. Below are some selected commodity charts with accompanying warehouse inventory statistics.

To put the moves of some commodities in perspective it is good to look at the 5yr chart of Nickel and Lead. They have had tremendous moves, along with the Chinese economy. These moves are not over, but it is worth being patient and waiting for a chart pattern to form that gives a cleaner entry point. Some other ideas from an earlier post can be seen clicking here.

Some interesting comments from Jim Rogers on the big picture and commodities.

Interesting Bloomberg commodities article. Click Here