Tuesday, January 31, 2012
Jim Puplava welcomes back noted technician Ralph Acampora this week. Ralph sees stocks headed higher, and is particularly bullish on the blue chip stocks, which are technically breaking out. In addition, Ryan Puplava checks in with a wrap-up of the markets, and Rob Bernard of the PFS Group discusses fixed income opportunities.
After months of waiting, it's finally time to trade copper from the long side... and potentially make 50% or more in copper stocks.
Copper is one of the world's most useful building materials. It's a good conductor of heat and electricity. It's easily stretched and shaped... and it's resistant to corrosion. That's why the metal is in almost everything around you... from computers and refrigerators to plumbing and automobiles.
As my colleague Brian Hunt often points out, this "in everything" attribute makes the metal rise and fall with perceptions toward the global economy .
Last year, copper busted. Nobody wanted to own the stuff because of fears over the global economy. Copper fell from $4.40 per pound to $3.10 per pound. You can see this bust in the two-year chart below...
Now look to the right side of the chart. You'll see that the plunging copper price has stabilized... and just rallied to a multi-month high around $3.80 per pound. You can thank China for this rally...
China imported 406,937 metric tons of copper in December. That marked the seventh-straight increase in monthly imports. It's also 78% higher than China's copper imports last December.
#-ad_banner-#This continued consumption has helped send copper to its highest point in four months. And supplies are getting scarce...
The inventory  of copper in London Metal Exchange warehouses is at a three-year low. That's incredibly bullish  for this trend.
Even so, the headlines are screaming economic doom and gloom. Greece can't complete a bailout deal. France is in a full-blown recession . The U.S. economy remains on the ropes. Some market  forecasters even say a depression  is in the cards.
The bears might eventually be right. But always keep in mind: The world has a way of not ending. And the time to buy an asset  is when pessimism is high.
That's why copper is an interesting trade at these levels. The price is down big since early 2011, but it's experiencing a bit of price strength now. And many copper miners are beaten-down and cheap.
Take Freeport-McMoRan, for example. Freeport is the world's biggest copper producer. It owns the world's best "trophy" copper asset: Indonesia's Grasberg mine. Freeport is giant: $41 billion in market value . And it yields 2%.
Over the last year, its stock is down 20%. Freeport's peers have seen their share prices drop between 20% and 40% over that same 12-month span. Should the world simply "not end," copper could easily go back over $4 per pound and force a big recovery in these copper miners. If Freeport rallies back to its 2011 high, it'd be a 35% gain from here.
If you make a trade here, keep a stop loss near the late-2011 lows to protect your capital. That way, you lose just a little if copper declines. But I think 2012 will surprise the bears... especially when it comes to resource stocks.
Right now, copper stocks are in the dumps... Should the economy simply muddle along, these stocks could experience a solid rally. That's why it's time to jump back into copper miners.
Great Investor Don Yacktman, founder and co-manager of the Yacktman Fund tells us how he continues to beat the overall stock market landing in the top one percent of all large cap mutual funds over the past one, three, five and ten year periods. Such outstanding performance was recently recognized by Morningstar, the mutual fund rating firm, that nominated Yacktman for Domestic Manager of 2011.
First of all, sentiment measures indicate that commodity prices are at levels suggesting accumulation. This chart from Mary Ann Bartels of BoA/Merrill Lynch (Note: the depictions of bull and bear phases are mine, not hers) shows that large speculators, who are mainly hedge funds, have moved off a crowded long in commodity prices. The chart was produced by aggregating the Commitment of Data reports for all futures exchange traded commodities in the CRB Index.
My depiction of the bull and bear phases show that during the bear phases, neutral readings are good times to fade the rally. On the other hand, neutral readings are good opportunity to accumulate positions during the bull phases. The bull and bear phases is best exemplified by the chart of the bellwether of gold prices, which bottomed in 2002 along with the rest of the commodity complex.
Just because there is a neutral signal from this is a good time to accumulate positions doesn't mean that there isn't more downside to commodity prices. To see some near-term upside, you need a catalyst.
Bullish CAT guidance the bullish catalyst?
I have offered that one of the key indicators to watch for market direction is to watch the corporate guidance and the body language from management during 1Q earnings season. A bullish catalyst appeared last week when Caterpillar, which is a cyclical company that does business worldwide, reported and gave guidance that was very upbeat :
We expect improving world economic growth to increase demand for commodities. Our outlook assumes most commodity prices will increase slightly in 2012 and continue at levels that encourage investment. We expect that copper will average over $4 per pound, Central Appalachian coal about $75 per ton and West Texas Intermediate crude oil about $100 per barrel. In particular, mining will be a source of growth in 2012 and growth will be so high that supply will have a tough time with meeting demand:
We expect mining to continue to be strong globally, and we have a sizable order backlog for mining equipment. We expect sales to increase in 2012 and are in the process of adding production capacity for many of our mining products. However, we expect sales to be constrained by capacity throughout 2012. Moreover, the WSJ showed that the American economy continues to grow despite last week's disappointing GDP report:
CAT was bullish on the outlook for US housing:
We expect total U.S. construction spending, which, net of inflation, has declined since 2004, to finally begin to recover in 2012. We project a 1.5-percent increase in infrastructure-related construction and a 5-percent increase in nonresidential building construction. We are expecting housing starts of at least 700 thousand units in 2012, up from 607 thousand units in 2011. They were sanguine on Europe because of ECB support of the eurozone:
The Eurozone public debt crisis has been a lingering negative, but it is unlikely to trigger a worldwide recession. The Eurozone will likely have at least two quarters of weak, possibly negative growth, but should begin to improve in the second half of 2012. For 2012, our outlook assumes economic growth for the Eurozone near zero and growth of about half of a percentage point for Europe in total.
Our expectation for improvement of European growth in the second half of 2012 rests on a continued easing by the European Central Bank (ECB). The ECB has recently lowered interest rates and could cut rates further in 2012. CAT also saw sufficient growth in China to support construction demand and commodity growth:
China took its first easing action in late 2011, and we expect that further easing is likely. We expect China's economy will grow 8.5 percent in 2012, sufficient for growth in construction and increased commodity demand. In addition, Joe Weisenthal highlighted some of the positive long-term fundamental drivers of Chinese commodity demand, namely a population that is rapidly becoming more affluent, which will raise demand for the consumer good life, such as electricity:
The "Chart of the Day" is Old Dominion Freight Line (ODFL), which showed up on Friday's Barchart "All Time High" list. Old Dominion on Friday posted an all-time high of $42.15 and closed up 0.17%. TrendSpotter has been Long since Jan 19 at $41.28. In recent news on the stock, FTR's Truck Loading Index in December was up +5.3% y/y. SunTrust Robinson on Jan 7 initiated coverage on Old Dominion with a Neutral. Old Dominion Freight Line, with a market cap of $2.4 billion, is a motor carrier transporting primarily less-than-truckload shipments of general commodities, including consumer goods, textiles and capital goods to a diversified customer base.
Since the spike in VIX in October of last year, short-dated volatility (and correlation) has dropped significantly, but the vol term-structure has steepened, and long-dated volatility remains stubbornly high. Goldman Sachs updates their volatility debt cycle thesis today and so far we are following the typical cycle post-volatility-spike - realized vols drop, short-term implied vols drop, term structure steepens, long-term vols drop - leaving them focused on both the implications of the current low levels of short-term vol and the high-levels of long-term vol. In brief, short-term volatility reflects very closely the current macro environment (GDP growth, ISM, high-yield, and Goldman's models) but longer-dated volatility trades significantly worse. The front of the volatility curve is in-line with the economics, the back is still pricing in potential damage. The volatility (variance swaps) market is expecting realized volatility to be very high over the next 5-10 years - the only time this has happened was during The Great Depression.
The four-stage model of post vol spike market behavior is very useful (if not somewhat obvious) in considering where we are in terms of sentiment. (more)
If you’re just starting out as a trader, the sheer number of technical analysis  patterns can be downright overwhelming. With literally hundreds of patterns to look for anytime you analyze a chart, it’s no surprise that new technical traders often suffer from analysis paralysis when they’re just starting out.
But it doesn’t have to be that way…
Today, I’d like to show you four simple chart patterns that could help you find your next profitable trade in 2012.
In his book, The Definitive Guide to Point and Figure, Jeremy du Plessis argues that:
“Some authors go on to list tables of patterns, but the need to learn patterns indicates a lack of true understanding of how a pattern is created. There is no point in trying to learn dozens of patterns; it is better to understand what causes them.”
As a market  technician, that’s one of my favorite quotes. When it comes to chart patterns, it’s absolutely true that rote memorization will only get you so far. Instead, it pays (literally) to understand how and why patterns are created.
At their most simple construction, patterns are just different arrangements of support, resistance, and trend lines. While I won’t get into too much detail over how those individual building blocks work, you should be able to see a lot in common with the four patterns I’m about to show you. So, rather than trying to memorize the pattern on these four formations, memorize the combination of support, resistance, and trendlines that combine to create them…
1. Ascending Triangle 
First up is the ascending triangle, a bullish  pattern that’s formed by a horizontal resistance level to the upside, and uptrending support below shares . Those two technical levels form a shape that resembled a right triangle. As shares bounce in between them, they get squeezed closer and closer to a breakout above that resistance level. When the breakout happens, it’s a strong buy signal for shares.
The bearish  opposite of the ascending triangle is a descending triangle . In a descending triangle, shares have horizontal support and downtrending resistance. The shorting signal comes when that horizontal support level  gets broken.
2. Head and Shoulders 
One of the most well-known technical formations is the head and shoulders top. It’s a bearish pattern that’s identified by a peak (the head), with smaller peaks on each side (the shoulders). Even though the head-and-shoulders is likely the most well known technical pattern, it’s still a valuable one: an academic study conducted by the Federal Reserve Board of New York found that the results of 10,000 computer-simulated head-and-shoulders trades resulted in “profits [that] would have been both statistically and economically significant.”
On the opposite side is the inverse head and shoulders, which, as the name implies, is just a flipped version of the head and shoulders top. It’s a bullish pattern.
In both cases, the trade signal comes when shares push through the neckline (sometimes called “shoulder level”) in the chart above.
3. Consolidation 
A consolidation channel (sometimes called an “If/Then Trade”) is a channel that’s bounded by both a horizontal resistance level and a horizontal support level. Frequently, consolidation channels come after large moves. They’re an opportunity for a stock to bleed off some volatility and for traders to think about their next moves. Unlike the other patterns we’ve looked at, this setup doesn’t have any directional bias until it triggers.
The trigger happens when shares push outside of the channel. When that happens, the high probability move is to take a position in the direction of the breakout.
4. Double Top
Finally, we’ll look at the double top; as the name implies, it’s a topping pattern (thus it’s bearish). The double top can be identified by two swing highs that peak at approximately the same price level — that price level is a strong resistance level, above which there’s a glut of supply of shares that overwhelms buying pressure. A double top becomes a short signal when shares push through the intermediate trough that separates the tops.
Not surprisingly, a pattern called a double bottom  is the bullish opposite of the double top.
While we’re hardly taking an exhaustive look at all of the potential patterns that you may encounter in the market, these four patterns provide a good sample of how the building blocks of support, resistance, and trend create actionable patterns. By keeping these four patterns in mind the next time you look at a chart, you’ll be better able to spot  other, more unconventional setups than traders who resort to rote memorization.