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CHART RELATIONSHIPS OFF THE BEATEN PATH

We are in a market where bulls make money, pigs make money, and bears get slaughtered. Pick your favorite…gold and precious metals, commodities, foreign stocks, or US mid-, small-caps, transports, or even the Dow. No matter what your flavor, they are all going up. It’s pretty much a matter of taste and risk. But as a practical matter, risk seems absent in today’s environment. There is no substantial evidence to suggest that we are at a major market turning point, and if we were, it wouldn’t be a bottom. By now, practically all money managers have formed their opinions, made their investments and are now either trading their opinions or investing them long term. So from that perspective, there is little to do. For example, if your were not a gold bull by now, in all likelihood you will never be one. Similarly, if you are skeptical of the US market, it is unlikely that you are soon going to decide to chase this market upward. Some potential meaningful chart relationships that stand away from the beaten path are featured in this article.

General Motors and Toyota

To listen to the media, the UAW is the primary reason for the rough times that General Motors is now having. It’s not for this writer to judge whether this is true, but a look at the comparative charts of GM and Toyota may shine some light on exactly what is the problem at GM. The chart below goes from the beginning of 2000 to the present, and compares the performance of General Motors to Toyota. From 2000 to the beginning of 2004, these two companies traded practically in lockstep with each other. Since they both make cars, this was as expected. But the two stocks parted company in early 2004, with Toyota making practically a b-line into positive ground. By contrast, GM made the opposite move south. If the primary reason for the charts parting company with each other was the UAW, then one would have to believe that the UAW was established during New Year's 2004. Yet we know that this is not the case.

One could make a strong case for the stocks parting company in 2004 because of a simple divergence of business strategy. General Motors took the path of the short term-minded, when they featured large vehicles over small ones. More importantly, their small cars were clearly inferior to those of the other car manufacturers. It is no coincidence that in 2004, there were large federal tax incentives provided by the government for business people who purchased the super-sized vehicles. This was described at practically that moment the stocks parted company in a previous Wrap-Up, entitled, “Nobody Needs a Hummer.”

The chart below illustrates the possible impact that the price of oil had on the relative performance of the maker of the Corolla versus the Hummer. It was at about the moment that oil broke out into its decisive bull market that the stock of Toyota went north, and GM, south.

Terrestrial Radio Showing Signs of Life

Watching financial TV and listening to the financial radio station, one would think that terrestrial radio is going the way of the buggy whip or Kodak film; their business decimated by the likes of satellite radio, Google, Yahoo and MSN. Yet based on what can be readily observed in American life away from the ticker, a different perspective becomes clear and compelling. The death of radio is highly exaggerated and this is beginning to show on the charts of these companies' stocks. Subscribers to pay radio come from the ranks of the affluent. Practically the entire demographic (rich folks) have heard of the existence of Satellite radio. Since they have the means and know about it, those with a taste for pay radio probably already have purchased it. Those who have not will either never subscribe, or it will take significant marketing costs on the part of the satellite companies to win these people over. The potential for satellite radio moving down the affluence food chain toward the middle class is unlikely in my view. The middle class US consumer is already in too much debt, and it’s difficult to believe that a monthly subscription for pay radio is in most folk’s budget. Automobile commuters will find that terrestrial radio is free and this is a key feature in a time when it costs $75 to gas an SUV. Finally, with mid-term elections around the corner, how can candidates advertise on say, Google? Radio advertising is much more effective than the internet in this regard.

Sitting here at a broad band connected PC, I can already listen to “radio” broadcasts from a variety of sources, all for free. In most cases, this renders pay radio in the home practically irrelevant.

The stocks of the terrestrial radio companies have been decimated by a couple of tough years, and the “story” of competition from pay radio, Google, and other internet companies. Yet the charts of some radio and media companies are showing signs of a comeback. Below are the comparative charts of Univision Communications (UVN), and Clear Channel (CCU). From 2000 forward, these stocks traded practically together until 2003. While UVN was the stronger of the two stocks, both stocks fell on hard times. Yet since late 2005, the stock of Univision has gotten quite healthy. This is shown in the comparative chart of the two stocks, below.

The chart below is a 7-month daily chart of Univision. After reversing in mid-October 2005, the stock produced a second gap up in February 2006. It has since been in a healthy consolidation. The “down” days are on lower volume than the “up” days. Five trading days ago, there was a high volume gap up after several weeks of tight consolidation. This is all bullish action.

The chart of Clear Channel Communication shows that it is likely to have made a bottom. This could have been observed in the chart which showed a bullish hammer in late April of this year followed by a series of “up” days. Additional weight was added to the potential of a reversal, when the stock failed to hold a new low concurrent with news of a “payola” scandal.

Are there other stocks in this sector that are bottoming? Perhaps there are. Below is a chart of tiny Saga Communications (SGA). The company, whose business fundamentals have not changed significantly, trades at almost a 10-year low. There is an extreme MACD/price divergence. Saga appears to have made a bottom; but a word of caution is in order. The stock is illiquid, and there is no observable insider buying.

An Unlikely Couple, Gold and US Stocks are dancing together

Until recently, the conventional wisdom was that what is good for gold was bad for stocks. Yet there appears to be a new and different friendship developing, and that is the apparent rhythm between leading stocks and that of gold. Since early 2003, the Russell 2000 small cap index and gold have pretty much tracked each other in both direction and magnitude. Yet in the last couple of months, gold has taken off in a parabolic manner, while the gains in the Russell have been more muted. Such action in gold and stocks would be expected under conditions where corporate managements had all the trust of the investment community, while helicopters dropped US currency down upon all lands of the world.

A look at gold to US stock index ratio charts may put some new perspective on the “bull market.”

The Google to Gold ratio shows a textbook head and shoulder reversal pattern.

Today’s Market

All indices were up today on relatively high volume. Every diversified index was in the green, highlighted by the Dow Transportation index which was up over 3.5% in a single day.

Since they topped last summer the homebuilders have been in a long term downtrend; yet whenever they appear to be ready to break down, a sharp and profitable rally occurs. Once again we are at that moment of truth. As you can see in the chart below, whenever the 14-day RSI reached the 30 percent level, we got a rally. While the long-term picture is ugly for this sector, the short term may not be as bad as it appears on the surface.

As shown in the 10-day candlestick chart of Standard Pacific Homes, a lagging homebuilder, the short term action shows a strong hammer, confirmed with high volume, followed by (more) positive action on high volume and negative action on lesser volume, all in a backdrop of bad fundamental news for the overall sector. While the long-term trend may be down, in my view, the risk/reward ratio favors the homebuilder bulls at the moment.

Similarly, there is much evidence to suggest that interest rates appear to be heading up in the long term. Yet the long term chart shows that the interest rate of the 30-year note has gone very far very fast, and the odds would favor a correction toward lower rates fairly soon, or at least some consolidation before the long term trend can advance significantly.

Yet the short term trend for the 30-year rate is UP. In the shortest of terms, let’s see if 5.26% holds over the next few days.

Confidence in the dollar should not be taken lightly, so from that perspective, it is important whether the dollar index holds the 82.5 level, a long term support level that has held on 4 separate occasions dating back to 1991.

In golf it’s called a Mulligan. Tomorrow is the monthly employment figures. If the markets don’t react as expected to the Fed-spin, you may see Mr. Bernanke take another “Bartiromo.” Only in America.

Have a great evening!

Martin Goldberg

Copyright © 2006 All rights reserved. Martin F. Goldberg, MS, P.E. Market Analyst Expert Page Commentary Archive Email

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