BUFFETT OFFER BUOYS FINANCIAL STOCKS -- NATURAL GAS STOCKS ARE NEW ENERGY LEADERS -- NAT GAS LEADERS ARE XTO, CHESAPEAKE, AND APACHE -- A COMPARISON OF COMMODITIES AND THE DOLLAR

THIS IS CORRECT YEN CHART ... In last Friday's Market Message, I tried to show that the Japanese Yen was starting to rally against all of the world's major currencies (in addition to the U.S. Dollar). One of our sharp-eyed readers correctly pointed out that Chart 5 was not the correct chart. Chart 1 is. It shows yen rising to a new yearly higher versus the British Pound after bottoming last July. That's right around the time that the yen started its upturn as the yen carry trade started to unwind. The Japanese currency has risen 18% against the Pound from its July low.

Chart 1

NATURAL GAS STOCKS ARE NEW ENERGY LEADERS ... On Monday January 14, I wrote a piece on how natural gas stocks were starting to show new leadership in the energy patch. That's still the case. Chart 2 compares the price of natural gas (red line) to crude oil (black line). It's obvious that the price of natural gas hasn't kept pace with crude. Judging from the recent price action in natural gas stocks, investors seem to be betting that natural gas prices will to play catch-up with other energy markets. Chart 3 plots a ratio of the Natural Gas Index (XNG) divided by the Energy SPDR (XLE) over the last five years. The sharp rise in the ratio since last October shows a clear preference for natural gas stocks.

Chart 2

Chart 3

THREE NATURAL GAS LEADERS... In the January article, three of the stocks that I listed as natural gas leaders were Apache, Chesapeake Energy, and XTO Energy. Chart 4 shows those three stocks plotted relative to the Energy SPDR (flat black line). On a relative strength basis, the chart shows all three natural gas stocks starting to outperform the XLE last September. The chart also that XTO remains the strongest and is followed by Chesapeake and Apache. Chart 5 shows their actual price charts. XTO and Chesapeake and trading at new record highs. Apache isn't far behind. The moral of the story is that all energy stocks aren't equal. If you're concerned that crude prices may suffer a downside correction during a possible recession, natural gas may be a better part of the energy patch.

Chart 4

Chart 5

DOLLAR/COMMODITY RELATIONSHIP... One of our readers asked for a longer-term look at the commodity rally. The blue line in Chart 6 shows the CRB Index starting its major bull run from a "double bottom" formation during 2002. The commodity index has just hit a new record high. Notice that the commodity bull market started just as the Dollar Index (black line) peaked during the first half of 2002. That shows that the trend of the dollar has a big impact on commodity prices, and that both markets trend in opposite directions. Another questioned how I could remain bullish on commodities if the dollar is bottoming. Actually, what I said last week was that the dollar was due for a bear market rebound, which could result in a bull market correction in commodities. There's no evidence yet that either the major uptrend in commodities, or major downtrend in the dollar, is ending. A newer reader asked why I was recommending commodities now when they had been rallying for six years. The fact is that I've been recommending commodities for most of those six years. Another asked for a more comprehensive and longer-range explanation of intermarket relationships. You can find that in my book entitled Intermarket Analysis (available on the Stockcharts Online Bookstore). Chapter 9 in that 2004 edition is entitled "Falling Dollar During 2002 Boosts Commodities" and includes a paragraph headlined "Dollar Top Leads to New Bull Market in Gold". Chapter 10 ("Shifting From Paper to Hard Assets") describes the re-emergence of commodities as the new dominant asset class for the first time since the 1970s.

Chart 6

BUFFETT BOUNCE HELPS MARKET ... News that Warren Buffett offered to shore up the finances of bond insurers inspired a bounce in financial stocks today. Chart 7 shows the Financial SPDR (XLF) gaining 1.7% today on rising volume. The rally, however, was limited to banks. Brokers actually fell today as did two of the bond insurers that Mr. Buffett offered to help. Ambac and MBIA both fell -15%. Talk about ingratitude. Although the day's market action was mildly encouraging, nothing has really changed in the big picture. The daily bars in Chart 8 show the S&P 500 SPDR bouncing today on higher volume (and holding above its January low), but still trading well below its recent high near 139 and its 50-day moving average. The SPY would need to close above those two resistance points to improve its short-term trend.

Chart 7

Chart 8