APRIL CRUDE OIL IS TESTING AUGUST HIGHS -- THAT'S GIVING A BOOST TO ENERGY ETFS -- MARKET VECTORS OIL SERVICE ETF IS BIGGEST PERCENTAGE GAINER -- HALLIBURTON AND SCHLUMBERGER ARE OIL SERVICE LEADERS
APRIL CRUDE OIL IS TESTING AUGUST HIGH ... My last two messages dealt with the recent upturn in commodity markets. During February, the CRB Index reached the highest level in a year. Most of those gains came in natural gas and agricultural markets owing mainly to weather concerns. This week saw more agricultural gains in grains (corn, wheat, and soybeans) and livestock markets (cattle and hogs hit record highs). Corn and wheat gains may also be partially due to problems in the Ukraine which exports both commodities. My main interest today is with two economically-sensitive commodities. The first one is crude oil which has been rising since the start of the year. Chart 1 shows the April crude oil futures contract (^clj14) having climbed 10% from its early January low. That futures contract is also challenging its August intra-day high. Needless to say, strength in crude oil is usually good for energy companies that produce that commodity.
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Chart 1
ENERGY ETFS SHOW NEW RELATIVE STRENGTH ... My message on Wednesday, February 19 that wrote about the rise in commodity prices noted that basic material and energy stocks were starting to show new relative strength. Both sectors stand to benefit from stronger commodity markets. Since then, the Basic Materials SPDR (XLB) has hit a new record high. Chart 2 shows the Energy SPDR (XLE) nearing a test of its recent high. The XLE/SPX ratio (above chart) also appears to be bottoming. Oil service stocks are doing even better. Chart 3 shows the Market Vectors Oil Service ETF (OIH) climbing to a new three-month high (on rising volume). It's also showing better relative strength. The OIH/SPX ratio (top of chart) has been rising all month. In fact, the OIH gained 7.3% during February versus 5.1% for the XLE (while the S&P 500 rose 4.3%).
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Chart 2
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Chart 3
SCHLUMBERGER AND HALLIBURTON LEAD OIL SERVICE RALLY ... The two biggest stocks in the OIH also happen to be two of the strongest. The weekly bars in Chart 4 show Schlumberger (SLB) nearing a test of its fourth quarter high near 94. A close above that level would put the oil service leader at the highest level in six years. The SLB/SPX relative ratio (above chart) is also starting to rise for the first time since 2011 (when crude oil started to weaken). Halliburton (the second biggest OIH stock) has an even stronger pattern. Chart 5 shows Halliburton (HAL) ending February at a new record high after clearing previous peaks formed during 2013 and 2011. Its relative strength line (above chart) shows a nice uptick during the first two months of 2014. No doubt, rising oil prices have a lot to do with the stronger performance of both stocks.
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Chart 4
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Chart 5
WEAK CHINESE MARKET MAY BE WEIGHING ON COPPER... My message from last Saturday showed copper underforming other commodity markets. The daily bars in Chart 6 shows copper ending February on a weak note. The falling copper/CRB Index ratio (brown line) shows copper underperforming the CRB Index this year. [Copper has lost -6% while the CRB has gained 8%]. I suggested last weekend that a weaker Chinese market might have something to do with copper's weakness, since China is the world's biggest buyer of that commodity. The falling red line (below chart) shows China iShares (FXI) also falling since the fourth quarter. That's negative for copper because a positive correlation normally exists between the two markets. The 20-day Correlation Coefficient (black line) shows that the correlation between copper and Chinese stocks has jumped above .75 since the start of the year. That's a pretty tight link between the two markets. The daily bars in Chart 7 shows the recent bounce in China iShares (FXI) meeting resistance at its 200-day average and its November low. It needs to clear both barriers to strengthen its chart pattern. Until that happens, copper may also continue to struggle.
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Chart 6
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Chart 7
BIG DROP IN CHINESE YUAN ... One of the week's biggest foreign exchange stories was the sudden drop in the Chinese yuan. Chart 8 shows the WisdomTree Chinese Yuan Fund (CYB) falling all the way to its 200-day average (red line). Although the drop wasn't that big in percentage terms, it was the biggest loss since the yuan was de-pegged from the U.S. dollar in 2005. Since then, Chinese central bankers have allowed the yuan to rise against the dollar in a very controlled fashion. That became a profitable "one-way" trade that was being exploited by global institutions and traders. The February drop in the yuan was apparently engineered by China's central bank by ordering Chinese banks to buy dollars. That was done to shake out some of the speculators in the market. It's also believed that the Chinese want the yuan to starting trading in both directions (and in a wider band) like other currencies. It's hard to tell if that will have any lasting impact on global markets. But a weaker yuan would make it more expensive to import goods to China.
