NATURAL GAS LEADS ENERGY SECTOR HIGHER

COMMODITY COMPARISONS... Mr. Greenspan has called a lot of attention over the past week to the strong upside potential in the natural gas market. We agree with his observations. Our charts suggest that natural has the most upside potential of all the energy markets. Even on a short-term basis, natural gas is outpacing all of the other markets. The July natural gas futures contract has already exceeded its previous high hit back in February. By contrast, the July crude oil contract is still $2.00 below its February high at $33. Heating oil and unleaded gasoline are even further beneath their February highs. Among the energy stocks, the natural gas group has outpaced all other groups.

NATURAL GAS INDEX... The AMEX Natural Gas Index has just risen above the high formed during the spring of 2002 which puts this energy leader at the highest level in twenty months. Its rising relative strength line (vs. the S&P 500) is at the highest level in two years. Although all three of the energy indexes that we follow have been rising, natural gas has been the strongest by far. Over the last twelve months, the XNG has gained 25% versus only a 1% gain for the Oil Service Index (OSX) and a -8% loss for the Amex Oil Index (XOI). During the first six months of this year, the XNG has climbed 38% versus 12% for the OSX and 8% for the XOI.

Chart 1

OIL SERVICE INDEX... The Oil Service Index, which is second in order of relative strength, has just broken out to a twelve-month high, and has broken the down trendline extending back to April 2001. Its relative strength line has been flat over the past year but may be close to an upside breakout. That would a positive sign that the OSX may also be starting to show better relative performance.

Chart 2

AMEX OIL INDEX... The AMEX Oil Index (XOI), which is comprised of the large integrated oil stocks, is still the weakest of the three. However, it has risen to the highest level in nine months. Its relative strength line since last October reflects the fact that it has been a market laggard. It's been moving up since April, which shows that some of the energy enthusiasm is spreading there as well. Although the biggest bang for the natural gas buck comes from the natural gas stocks themselves, a lot of big integrated stocks also stand to benefit from rising gas prices.

Chart 3