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 

CTS Spotlight for the week of December 10th, 2010

Hello and welcome back to CRI's CTS Spotlight

12/10/10: The US dollar continues to consolidate its recent gains. Because of this, we appear to be stuck in a bit of a holding pattern within many commodity markets. Is the US dollar bottom for real? It's too early to tell but I'll have to admit, from Coffee to Aussie dollars to Swiss Francs, there are quite a few markets setting up for a trade - you can literally see it coming. Having said that, the market does have a lot of steam behind it so I won't be looking for a breakdown until at least the new year. In this week's CTS Spotlight we shall look at one of the few markets not to rally in 2010, Cocoa, and how that may be about to change.

Cocoa:

With all the news in commodity land of late, one is always hoping to grab the next big move. The recent bullish action in Cocoa prices, coupled with political turmoil in The Ivory Coast (where almost 80% of all cocoa supplies come from) had me thinking that a big move might be coming. Then we look at the charts and we come back down to earth.

While Cocoa prices have done virtually nothing for 2010 (which is one reason I thought we might have a long trade here), price have moved steadily higher over the past decade. Indeed, so much so that when one looks at the monthly price chart (on right above) one can clearly see that even the most aggressive price targets have all been hit. We can also see that 'real' support for Cocoa prices actually sits near the 20 area not the current 30 area. Supporting this argument, a very simple 50% retracment of the 2000's bull market would bring prices back into the 21 area [(8+35)/2 = 21.5].

From a shorter time frame (weekly on left above) we see that Cocoa prices are actually working a very clear bearish flag pole formation. The formation has taken almost a year and a half to play out. It was confirmed when prices broke through last January's lows (just under 28) in July. Because of this, one ought to be reluctant to get too bullish until this pattern has played itself out. The target here is near 24 which would coincidentally bring prices back to the 5 year Monthly trend line.

So, while I would love to report CRI had found another great market to get into, this just isn't the case. I will be watching Cocoa as it nears the 24 to 25 area as we may get a trade-able bottom at that point. But for now, a big nothing....

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

p.s. Swiss Franc has rallied into topping zone mentioned a few weeks ago in CTS Spotlight. CRI will be looking closely at the June puts and may issue a CRI OnlyDoubles NewTrade Alert...

CTS Spotlight for the week of November 26th, 2010

Hello and welcome back to CRI's CTS Spotlight

11/26/10: The US dollar continues its' counter trend rally as growing fear over European debt problems and the very real threat of war has sent the market scrambling. Contrary to this, growth prospects for North America are looking better with every passing day. Yields are starting to move higher which has given int'l investors a reason to own American. This 'perfect storm' of pro-America/anti-international could lead to a BIG MOVE. If the bullets start flying in earnest there will may be a massive move into the US dollar as traders 'wait-it-out' in still the world's only true reserve currency. Couple this with European default fears and it makes for a not so fundamentally sound int'l market. On a brighter note, two areas that continue to look good are meat and energy. We looked at Cattle last week in CTS Spotlight and this week we shall look at some of the energies. 

Energies

This is one area of the commodities market that has not been in the spotlight for some time. In fact, while the grains and metals have gone parabolic over the past few months, there has been a relatively quite stealth bull market going on in crude in particular and energy price in general (with the one exception being Natural Gas). This stealth rally seams to be well entrenched and based on sound fundamentals. Inventories have been steadily declining while the economy is slowly improving. Couple the resurgent US economy with a forecast for a much colder North American winter and it is not surprising to see that this sector has been steadily moving higher of late. Should prices move in the fashion of other commodities rallies of late, we may see energy prices move back into the center spotlight. 

Ironically enough, the Fed's injection of $600 billion dollars into the economy over the coming quarter may be entirely gobbled up by rising energy costs. Not only will the rise counter act the Fed's injection but it will further enrich the Arab nations at the direct cost to US taxpayers.......you just can't write better fiction than reality.

Regular readers of CRI publication should be well aware of the Uranium bull market underway. OnlyDoubles's NewTrades subscribers have enjoyed several doubles over the past month as the junior Uranium sector has come alive on ridiculously low stock valuations coupled with increased demand news from China.

Looks like unleaded-gas prices are going back up.....ugh!

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

CTS Spotlight for the week of November 19th, 2010

Hello and welcome back to CRI's CTS Spotlight

11/19/10: In a week that saw the US Fed Chairman defend his US domestic policy focused agenda (which should be the case) the long end of the yield curve has begun to rise appreciably. The US Fed's QE2 program is doing exactly what Mr. Bernanke desired in that the curve is steepening, money is starting to leave 'safe-havens' (in particular the Swiss franc) and one can't help but get the impression the general economic situation in North America is improving. While still a bit above my desired target, the US dollar has taken out the 'stops' (most recent resistance) suggesting the torrent of US dollar selling may be waning. As well, Money does seem to be leaving 'hard' assets and moving into 'soft' ones again. Enjoy the run while it lasts as this may be a trap. I say this now because as of last week all the equity markets that CRI follows are pointing higher. Not a signal in itself (when this happens) it is often a contrarian sign of the end of a sector's move. In other commodity markets, grains prices look 'toppy' while beef prices look strong. In our CTS Spotlight we look at a few of these markets and where prices may be headed.


Grains/Meats

1. Grains: The 2010 North American growing season was dominated by news of a European grain crisis (specifically Russian wild fires and talk of export bans). Most interesting here, wheat prices (upper right) have not moved higher since the initial news of export sales bans out of Russia. In fact, one could argue prices will have a very hard time moving higher in the coming years if the current triple top isn't broken soon. Prices just this week broke back below support and are now pointing substantially lower. The weakness in wheat prices is starting to have a negative impact on other grains. Oat prices (upper left) have put in a nice tight double top and are testing the up trend line. Should this fail there is plenty of room for prices to fall. Aside from regular 50% retracemnents, Oats have lots of gaps to fill in. Should the selling get going in earnest, price could easily see the lows of last spring again.


2. Meats: The recent win by the Republican's in the mid-term US congressional elections was a boost for American Cattle producers in that their collective voice will be heard much more if and when the Republican's are in charge of Congress. CRI has been suggesting beef prices want to go higher for some time (even did an OnlyDoubles trade last spring being long Feeder Cattle). While prices in Feeder's are way too volatile to take a position, any consolidation might represent a potential entry. Live Cattle on the other hand is currently sitting within 1.5 points of its breakout and might represent a nice entry. Should grain prices indeed top here, one could easily see meat prices move higher as both upside technical targets exist and beef prices in general have underperformed other commodity prices appreciation over the past ten years.

That steak you like so much is gonna get a bit more expensive :(

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

CTS Spotlight for the week of November 12th, 2010

Hello and welcome back to CRI's CTS Spotlight

11/12/10: In a week that saw little change to most commodity trends, the US dollar bounced enough to trigger some aggressive stops. While we are still a bit above our downside target for the dollar index, one can't help but get the feeling a dollar rally/commodity sell-off is very close. Additionally, we have been looking for the market to rally into the US mid-term congressional elections and we got it. Now that the event has come and gone, a period of consolidation shouldn't be too unexpected. Interestingly, Japanese stocks have bottomed and now join the rest of the world's equity indexes in rally mode. This is probably because Japanese exporters see a US dollar bottom/Yen top coming. However, the fact that all world stock indexes are moving higher (in unison) suggests the equity bull run is very near an end.  

Japanese Stocks (Yen vs. Dollar) 

A few weeks ago CRI examined the Japanese Yen and suggested we were in the late stages of a Yen rally/US Dollar sell-off. So much so that and one ought to consider taking the other side of the trade when it eventually reverses. While the Yen's price action isn't quite bearish yet, there are a few signs that the Yen Bull might be loosing steam.

If one looks at stocks as a harbinger of growth to come, then one must clearly get the message that the world economy is expanding once again (S&P 500 hit new 52 week high last week). From Europe to the Americas to Asia, growth is once again quite alive. It is interesting to see that while the US economy was faltering, money was moving in earnest into the Japanese Yen. This 'flight-to-safety' not only pushed to Yen to multi-year highs vs. the dollar but it also destroyed any profits Japanese exporters enjoyed while selling their product into the US market. Now that the US economy (and with it the primary world growth engine) seems to be back on-line, one can clearly get the feeling money is starting to move back into the US. As well as the dollar index breaking its most recent resistance point (and associated stop level at 78.364) the Japanese stock market has finally put in a respectable bottom. Additionally (as CRI has pointed out over the past few weeks) bond prices are breaking down (and inversely interest rates are going up). 

So if one puts all of this together, it would seem rather clear that the US Fed's policy (flooding the market with liquidity until the US economy regained some traction) has worked. The Fed's finesse of the yield curve has induced a steepening of the curve. Long bonds are topping and equities are moving higher on this.
 

Now for the problem: Almost every time I have seen ALL the world equities rallying at the same time, we are very close to a top. The fact that Japan wasn't participating was actually good as we here in North America could quietly move higher (under the proverbial radar screen). This is no longer the case as the public is starting to pay attention to the euphoric moves higher in stocks. Unfortunately both rising interest rates and already high commodity prices shall act as a break on too much more of the equity rally......

So enjoy the rally while it lasts and understand that we are getting very late in this world economic expansion so much so that even markets that shouldn't be going up are starting to...

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

CTS Spotlight for the week of November 05th, 2010

Hello and welcome back to CRI's CTS Spotlight

11/05/10: In a week that saw both US mid-term Congressional elections and the US FOMC meeting (among other important trading events) the markets has taken a decidedly bullish stance heading out of the events. The market got what it wanted; both a market friendly Republican controlled US House of Representatives (which ought to put a break on out-of-control Democrat spending) and an additional guarantee of $600 billion in bond purchases by the Fed....let the party resume! We shall examine the Fed's plan and how the charts look in this weeks' CTS blog spotlight so be sure the check that out. Interestingly, Japan's equity index has finally started to move a bit higher. Should this market start to rally in earnest we will know indeed the end of the run is close at hand.

US Bond market - Fed action

In its recently released minutes to the Early November FOMC meeting, the Fed said they are prepaired to inject another $600 billion dollars into the US economy through bond purchases. Specifically, they said they will be targeting the 2 to 5 year US government bonds in an attempt to both steepen the yield curve and 'jump start' the US economy. This week then I thought as a follow up to last weeks' European Bond charts, we would look at the US bond market, which durations are moving and what the yield curve looks like now.

(Please refer to charts above)

Interestingly, the US 30 year bond is NOT participating in the latest bond market rally. Is this what the Fed wants? Notice too that the 10 year bond is starting to roll over. Since we now know there will be another 600 billion in Fed purchased, it is not surpriseing to see both the 5 year and 2 year markets moving to new highs. So then what does this action do to the yield curve?

Here is a current graphical representation of the US government yield curve. Notice how steep it is? This is a healthy growing economy and it is no surprise that the stock market is happy and moving higher. The US government is giving the public a $600 billion check and the market is putting it to work. The problem (if  and when comes) will be when the curve inverts (this is where short term rates are higher than long term rates and is a very good tool at timing recessions). This simply is not the case currently.

Conclusion: The Fed is getting what it wants, the economy is slowly turning....lets hope they know what they are doing.
(oh and by the way.....I have total confidence they DO NOT but enjoy the flood of liquidity while it lasts)


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

CTS Spotlight for the week of October 29th, 2010

Hello and welcome back to CRI's CTS Spotlight

10/29/10: We have finally made it to the US mid-term congressional elections (to be held this coming Tues. Nov. 2nd). The market has priced in a Rep. party victory in the House, the question now remains will they take the Senate too. Stocks are generally happy (with the notable exception of Japan) and look to continue their recent rally. Commodities in general are strong and until we see a discernible bottom in the dollar, that trend has no reason to abate. It has been quite a run since Aug. (for example, CRI's OnlyDoubles has had 3 doubles in the month of October alone!) but there are early warning signs of the end of this Euphoria. CRI's DI index is looking very toppy and bond markets in Europe have started to break down (please refer to this week's CTS Spotlight). Should the US Fed's 'shock & awe' quantitative easing indeed work, then one might expect to see serious deterioration in bond prices which will then ultimately lead to a deterioration in equities. We are not at that stage yet, so enjoy the top of the market while it lasts.

European Interest Rates:

While growth within the US is still in question, there are clear signs that the bond market is starting to price growth back into the equation in other parts of the world. Specifically today, we look at two big European issuers of debt - Germany and Britan. Both bond markets are clearly in long term bull markets (lower charts) but there are signs of the bears taking control in the short/medium term (upper charts). 50% retracements will bring both markets back into long term support areas so those fixed income investors out there, be patient and wait for yields to raise a little more before locking in.

Historically low 10 year US treasuries?

 

Every once is a while I like to look at really long term charts just to put where we currently are in historical context. Here then is a 200 year chart of US Treasury yields from back in 2002. The most recent chart hasn't changed that much other than yields are still falling. 

 

While one can draw many different conclusions about government yields and the development of a country, there are some basic ideas we can take away from the long term trends.

1. The combination of the 'baby-boomer' generational influences coupled with a peak in world socialism pushed inflationary pressures and thus yields to historically anomalous levels. 

2. The simultaneous unwinding of both of these significant market forces may bring the market right back to where it started. Baby-boomers's demand for hard/fixed-income assets shall dominate while current 'emerging market' politics/economics have all but crushed the gains of the international socialist movement. Trade union, what trade union?

The more things change....the more they stay exactly the same....

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