CTS Spotlight for the week of December 17th, 2010

Hello and welcome back to CRI's CTS Spotlight

12/17/10: As has been the case for a few weeks now, money is once again flowing back into the US dollar. The stabilization comes on both better economic news from North America and worsening debt concerns in Europe. Stop gap measures won't fix structural problems, the only resolution is a meaningful fall in the Euro. (making investment in Ireland, Spain, Portugal, Greece, etc. relatively attractive again). What CRI finds so interesting here is that know one is commenting on how well Germany (and specifically German companies) is doing. Those members who are profitable at these levels have seen their markets boom higher. Speaking of booming, equities continue to zoom higher with every index followed trending up. The recent tax compromise out of Washington, coupled with QE2 has both relieved the market of potential selling pressure and once again put a bid in stocks. This weeks CTS Spotlight looks at the professor of economics (HG Copper) and what he is saying, should make for an interesting read.

HG Copper

This week we shall look at Copper from a rational perspective to see if the recent price action makes sense given the current fundamental and technical pictures. 

Economic indicator:

Copper itself is considered an excellent barometer for economic output and has thus been given the title of 'Professor of Economics' in the marketplace. If copper prices are trending higher, odds are it means someone, somewhere is buying. In most cases too, buying means building, which of course is another way of expressing economic activity. Yes there have been cases of market manipulation (Haminaka of Sumitomo Bank was the last to try back in the '90s) but by in large, a upwardly trending copper market is a hallmark of economic growth. According to CRI's most recent CTS, Copper has been trending higher now for 99 weeks (or a little under 2 years) with the most recent weekly 'buy' signal being issued at $4.08 just a week ago.

Fundamentals

While traveling through Transport Canada's offices here in Vancouver recently, I overheard a cute anecdote that I think summarized what is going on in commodity land of late. One bureaucrat scoffed at another, "last year it was airports, this year its rail". He was referring to China, of course, and the ferocious build-out of its economy. That got me thinking, what are some of the most basic necessities of building rail networks? Steel (for the rails), Copper (for the electrical wiring) and Concrete (for the buildings) were three thoughts that came to mind. So one would logically conclude that if this were indeed the case we would see huge draw-downs in the world's supply of these (along with many other) commodities. With this in mind, below is a chart of warehouse stock piles of Copper as reported through the London Metals Exchange (LME). Indeed, stocks have been dropping, confirming our thesis. Since we know Austerity programs have nearly halted development projects in Europe and North America is still treading water, the only region to be able to buy in this kind of size is Asia. One additional piece to the fundamental picture, there is word out of late that there is going to be a an ETF (Exchange Traded Fund) floated for Copper. In recent years Gold and Silver ETF's have been floated and the demand was very strong. Considering where we are in the 35 year 'fear-greed' cycle, I wouldn't be surprised to see a lot of demand for a Copper ETF. With this in mind, one could argue that the lack of demand from the industrial side here in North America could be replaced with investment demand from the ETF community.

Technical

Warehouse stock analysis

A closing note on the chart above, the drop in warehouse stocks over the past year has been so dramatic (by almost half!) that a 50% correction of this move does seem likely. While there is no 'bottom' in stocks yet, should a double bottom come in over the coming weeks, a rally into the 45,000 area shouldn't be unexpected.

Price chart analysis

Listed above are the short term and medium term monthly price charts for Copper traded on the COMX. Since we can all agree that prices are moving higher in the short term (daily & weekly pointing higher) I thought we would take a look at the market from a little longer term perspective to see where we may be going over the coming weeks and/or months. 

The first thing that jumps out at me is that one should definitely be LONG this market from the monthly breakout at or near $3.68. This breakout corresponds with the broader market buy signal (Please refer to CRI's S&P 500 Blog for more on this) that was generated through the month of September as the market got news of both a change in the US Federal Political landscape and of a further US Federal Reserve Board Stimulus spending package. The breakout also confirms a massive bullish flagpole formation which suggests prices want to ultimately get up into the $5.00 area! While I think that target is still a ways down the road (maybe on the day of the IPO of the ETF), the fundamentals do suggest there is enough demand. In the near term, the top of the trend channels (for both the two year trend and the 5 year trend) seems to collide at or near the $4.50 area. As well, the current weekly price target for CRI's most recent CTS is also in the $4.50 area [Bull flag; (4.084-3.178)+3.606].

If you are in the trade from $3.68 then give yourself a big pat on the back. You played the breakout and it was spot on. There is no doubt about it, this market is 'going parabolic' so you may see that $4.50 target hit in the next week or two. CRI's CTS was given a new entry at $4.08 (on the move to new highs) but please keep in mind, this is a very speculative trade, not an investment quality signal at all. The low volume holiday atmosphere might just what the pros need to play with the charts.

Here is the tricky part - stops on this Monthly breakout trade should STILL be just under support at/near $2.72 (because it has been a straight line move up). This means one can realistically expect a $.43 correction at any given time. I wouldn't be surprised to see that exact thing happen after the first week of January with the market ultimately bottoming in mid February. My hunch is we will probably trade back down into the mid $3.00 area since that would be close to the monthly up-trend line (chart on left). As well, a 50% retracement of the recent rally would bring price back to $3.47 [($4.225 + $2.77)/2 = $3.4745]. Once we get a pullback (and then a subsequent move to new highs) we will have a new support level to move our stops to but that may be weeks if not a couple months down the road. If you missed the trade DO NOT go a buy this market now. Wait for a correction and then look to enter because heading into the spring, this looks extremely bullish. But, of course, CRI will be more than happy to let you know when we are pulling the proverbial buy trigger once again...

That's all for this issue of the CTS Spotlight,
Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com