The chart on copper looks very interesting. Ever wonder why investors call it doctor copper?
"Doctor Copper" - Market lingo for the base metal that is reputed to have a Ph.D. in economics because of its ability to predict turning points in the global economy. Because of copper's widespread applications in most sectors of the economy - from homes and factories, to electronics and power generation and transmission - demand for copper is often viewed as a reliable leading indicator of economic health. This demand is reflected in the market price of copper. Generally, rising copper prices suggest strong copper demand and hence a growing global economy, while declining copper prices may indicate sluggish demand and an imminent economic slowdown.” - Investopedia
Dr. Copper should be watched very closely from here on out. It bottomed in December 2008 long before the equity market bottomed as the Chinese stockpiled resources in advance of a large infrastructure stimulus package. In addition, I think investors are focusing way too much attention on Euro drama this week when we’ve had a few positive catalysts already present themselves on the economic front. These catalysts are largely being ignored while investors focus on hourly headlines out of Europe. I’ll be looking at both technical and fundamental factors investors should consider when viewing copper.
Technical Take on Copper
While copper was down as much as 6.7% at the lows today, the chart is telling an interesting tale for those with a trained eye to see it. For starters, we’re testing the $3 low we bounced from just two weeks ago – on less momentum. Because we’re testing those lows on less momentum, it sets up bullish divergence – a warning sign that typically precedes reversals. Lastly, the correction looks long in the tooth and overdone. Recall that copper has been falling since February. The Elliott Wave count looks to have just finished a major correction pattern. A successful retest of the October 4th low has been achieved. A bounce back to $3.45 and a breakout will confirm a bottom.
Let me specifically state that copper has not reversed its negative trend; however, the signs above are the setup it typically takes leading up to a major reversal with three components:
- A major support/resistance zone
- Momentum divergence
- Capitulation volume
Dr. Copper isn’t the only commodity we can look at as an indicator of economic growth. Oil is the blood that transports oxygen to the cells of our global economy. Recent inventory and price data has been bullish on that commodity. has held as support for two months and oil is trading back above its 50-day moving average. The chart looks to have a high chance of establishing a bottom ahead of copper. A break above would confirm a bottom while bullish divergence in momentum has already warned of a bottom.
One final technical indicator I’d like to leave off with is the Baltic Dry Index. The index tracks worldwide shipping prices of dry goods. Anybody notice the recent trend since August?
Fundamental Factors
A chart alone isn’t the only recipe to go and buy an investment. That may work for day-traders, but investors need long-term catalysts. So let’s look at some of the recent events that the market may be ignoring that you and I cannot. First of all, economic indicators have ticked up. Here’s a long list over the past two months (U.S. data).
- September’s ISM manufacturing Index – up
- August Construction Spending – up
- September Motor Vehicle Sales – up
- September’s ISM Non-manufacturing Index – up
- September Payrolls – up (though Verizon skews data)
- October Claims data – down
- October oil inventories – down
- October University of Michigan sentiment – down
- September Retail Sales – up (up big in autos, gas, clothing, and restaurants)
- Construction – Trend shows housing bust is rental boom – multifamily construction up 30% between Q2 and Q3.
- August Business inventories – up (0.5% same as July)
- NY Empire State Manufacturing Survey – down but ticked up
- Philadelphia Fed Survey – UP BIG and entered expansion zone (8.7 versus -17.5 in September)
- Dismal Scientist – “Third Quarter U.S. Growth Appears Closer to 3%”
The only negative I’ve seen in the economic data has been sentiment, but that doesn’t seem to be affecting retail sales, which have been impressive. Restaurant sales have shown 5 consecutive monthly gains. If people are worried and curbing their discretionary spending, then why are they going out to dinner? Autos dropped in August but surged in September up 3.6%. One man’s loss in housing construction is another’s gain as rental construction has surged over the past quarter, up 30%.
Falling commodity prices are self-correcting as are rising commodity prices. If prices rise too high, as they did in the first and second quarter of this year on the back of QE2, then it pinches our pocket book and we cut spending. However, if prices drop enough, then margins widen and consumers spend.
China’s GDP came out Monday night and it was below the Street’s consensus at +9.1%; however, China’s industrial production, retail sales, and fixed investment have all come in ahead of consensus. Specifically, Industrial production was up 13.8% versus September 2010, retail sales rose stronger than expected up 17.7% over a year ago in September, and electricity output increased 11.5% from a year ago (though sequentially decelerating over the past few months). Recall however, that China has been in a restrictive monetary policy shift over the last year or so as it attempts to cool its growth. That seems to be working just as they allow their currency to rise versus the dollar, but I don’t think they’re going to hard stop. Analysts have been heckling China’s growth for years. This time is no different.
So U.S. economic data is ticking higher. Oil prices have stabilized and possibly sending signals of a trend change. China’s growth has decelerated, but hardly a hard stop with GDP growth of 9.1%, retail sales of 17.7%, and industrial production of 13.8%. There’s hardly the justification in the markets for copper’s 35% correction from the February highs. The market has priced in recession, if not depression already. This may just be a dead cat bounce in the economic indicators, but lower commodity prices are the fuel the U.S. consumer needs to stimulate discretionary spending. Despite housing construction still in the doldrums, multifamily construction is booming and that should help lift copper.
Copper has technically fulfilled a lot of the requirements it needs to put in a major bottom with momentum divergence, a major support zone, and a bearish corrective pattern that has completed (Elliott Wave’s Flat 3-3-5). Other economically sensitive commodities have also already stabilized with oil’s rise from $76 to approach $90 on Wednesday. Crude’s downward trend has broken and a sideways trading zone has developed. A break above $90 will confirm a bottom and new uptrend. To top it off, the Baltic Dry Index is telling us demand for shipping dry goods around the world is trending higher.
What more do investors need to jump on the copper trade? Sure you have regulators considering position caps and other means of controlling prices, but then you’ll just create black markets or trading volume will shift from the U.S. to Shanghai (it most likely will anyways as China becomes the next money center). For the intermediate term, I’m bullish on copper and I’m bullish on the economy. The credit crisis is still a concern in Europe, but policy chiefs have signaled to the market they’re finally taking it seriously. As Jim Puplava said in August, “they’ll drive the car to the cliff’s edge with both tires over before they come to their senses.” So they have, but now they’re ready to throw the kitchen sink at the credit problem as they consider numerous ways to leverage the European Financial Stability Facility (EFSF).
The European credit crisis has created an event that has shifted sentiment from one extreme to the other. Investment managers and investors are bearish as sentiment indicators show extreme bearishness and cash levels are high. Economic indicators at the end of the third quarter showed some bullish momentum that could power a year-end rally. With cash levels this high and performance anxiety just as high, the pain trade is higher, and that should be bullish for the markets, the economy, copper and oil.
