Thursday, June 28, 2007

Stocks lead commodities

I finally learned how to make a hyperlink in this blog so I am a very happy camper to say the least ! Took me a while but I have arrived so as they say, to a man with a hammer, everything looks like a nail !

I wanted to touch on somethingthat is very important in my trading anlysis and that is the fact that stocks lead commodities. Now nothing is 100% certain (except death and taxes) but this does tend to hold true more often than not. For example, the gold stocks should lead the bullion, not because stock traders are smarter than the guys in the gold pit. To the contrary, the guys in the pit are some of the shrewdest and savviest around, rather the gold stocks are heavily levered to the price of the underlying. Therefore, when gold does move, profits flow to the stock's bottom line, assuming no adverse acts of nature. That's why I watch the Gold Bugs Index ($HUI) which should lead the bullion if a move is coming.

I had a lot of clients in resources stocks back in 1998-1999, yes a tough time I admit, I really didn't get it, or this time is different, so I was continually told. Sir John Templeton, who writings and thoughts you all should make yourselves very familiar with,often said "this time is different" are the 4 most expensive words ever uttered in history. Inco was a stock I owned that started coming out of the hole for ahead of the price of nickel and was swimming in dough due to their cost containment during the lean years as anyone who survived started printing money. Shell Canada was another example. The time frame with which stocks lead is subject to debate but what you want to see is leadership in this fashion.

Lets turn to crude of which you know I am a raging bull. I spoke with some friends back in early May who follow markets closely, and most were neutral, some short, and some involved in spreads with crude the short. I explained my position that as I saw it the Oil Service Holders (OIH), along with Amex Oil Index ($XOI) was leading the charge and this was a good indicator. As crude ($WTIC) looked like it was ready to break the OIH was making new highs and this is a good indicator and readers of my earlier post would know I call this a positive divergence. Crude itself should play catch up here to the stocks which would be healthy for this market.

This inverted head and shoulders on crude that I am enamored with implies a target of $80-85(actually $82 is my preferred number but 80-85 is close enough, like in horse shoes and hand grenades) so there is plenty room to run and with 3 carrier strike groups(thanks to Mike over a Futurejacked for bringing my attention to that) in the Persian Gulf, there is no telling how high crude can go. Pssst.... it has a 1 handle and 3 digits are involved. Now how is that for being bullish. I certainly don't want to be labelled a permabear. For those that need fundamentals to make the world go round, which I do, but I take em' with a rather LARGE grain of salt given the state of corporate ethics currently, the true big three the ones we should be familiar with are not GM, Ford and Chrysler but rather Ghawar, Burgan and Cantarell. I am waiting for Don Luskin or Ned Reilly to go on CNBC and tell us how higher oil prices are dis-inflationary and we have less to spend on other items !! and they hit the buy button on Nike and Best Buy, tragic if it weren't so comical.

Speaking of the large grain of salt I take corporate fundamentals for I am no C.A. but what for the life of me I cannot understand is how these mortgage outfits like Countrywide, etc treat revenue for neg-am ARM's. As far as I am aware, they are booking the entire amount as revenue earned even though the homeowner is only paying a fraction of it, and in all likelihood will not pay it. Ethics should be mandatory business school study instead of an elective. Good luck and good trading to you.

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