The Futures / Inter Market Report

Trading the World's Markets

November 9, 2007

Matthew Caruso, CMT

If you have any questions, send them to:

e-mail: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

Gas to outperform Oil – Health care an upcoming leader

            In recent months Rbob gasoline has underperformed crude oil. The likelihood of this happening was discussed in this letter on June 15 (http://tradesystemguru.com/content/view/61/58/ ). The truth is that the out performance of Oil from late spring to early/late fall is typically and occurs almost every year. As a follow up to the June 15 report (see that report for a greater understanding of this week’s report) we now see signs of the strength in crude vs. gasoline. The relative strength line of crude vs. oil is shown in figure 1. This line is simply the ratio of the price of crude divided by the price of gasoline, ex. $96.32 / $2.45. This compares the 2 commodities in a relative manner. If both commodities rise but gasoline rises faster, the line will fall because the denominator will be larger relative to the numerator than it previously was. As you can see in figure 1, gasoline has now been outperforming crude for a couple of weeks and is showing signs that the annual relative strength in gasoline vs. crude has begun.  It is important to remember that this does not mean gasoline prices wil rise, rather they will out perform crude. That could mean that gasoline falls less than crude or rises more than crude on a percentage basis. 

Figure 1 chart by Metastock 

            It is no secret that this past week the stock market took a tumble. This letter did not report on the potential for a market fall in the past couple of weeks but 3 important reports were written here that would have greatly served the stock market investor; one on August 3^rd (http://tradesystemguru.com/content/view/77/58/), another on August 31^st (http://tradesystemguru.com/content/view/83/58/ ) and lastly one on September 14^th (http://tradesystemguru.com/content/view/87/58/). These reports clearly outline weakness in the financial sector and that it should be avoided. As well, Citigroup was presented as a poor stock to be in and McDonald’s a preferred stock. As well, anyone hedging against a market decline with the Swiss Franc as recommended on August 3^rd would have been handsomely rewarded during the recent stock market trouble (the Swiss franc was also reported to climb higher on October 19^th and a target of $0.90 was given). 

            All that was in the past and now we are looking to the future. The reason I brought up those past articles is that one of the previously bearish sector is now reversing its trend and becoming bullish. The now bullish sector is health care and its relative strength chart vs. the S&P 500 can be seen in figure 2 as represented by the XLV etf. As you can see, the relative strength line has clearly broken above its down trend line that has served as strong resistance at 4 previous times. This breakout has long term implications and health care will likely be a leader for the next few years. Of course, not all stocks in the sector are equally bullish. If you look at figure 3 Merck is a clear leader in the group. On the other hand Pfizer is one of the weakest in the group. Therefore going forward Merck and other leaders such as SGP are the best way to play out future health care strength. 

Figure 2 chart by Metastock

Figure 3 chart by Metastock 

---------------------------------------------------------------------------------------------------------------------------------

Disclaimer