Tuesday, January 31, 2012

Time to be Long this Silver Stock: SLW

After spending more than a year "digesting" big gains, Silver Wheaton (SLW) is ready to head higher...
Regular readers know we consider Silver Wheaton one of the premier silver plays in the market [2]. Silver Wheaton isn't your average mining stock. It doesn't operate mines or explore for mineral deposits. Instead, it finances lots of early-stage silver projects... and collects royalties when those projects start producing silver. This makes the company a diversified, leveraged way to profit [3] from rising silver prices.
In 2009, with shares [4] trading around $13, we noted how this stock was enjoying one of the strongest uptrends in the market... and could explode higher in a precious-metals bull market [5]. About two years after our note, SLW had tripled in price. But like all big moves, this one needed time to "digest" its gains before going higher. That's just how the market works.
You can see in the two-year chart below that SLW spent 2011 "digesting" in a volatile, sideways range... which frustrated both buyers and sellers. During this sideway move, sellers twice managed to knock SLW down near $27. The stock rebounded both times. As Steve recently noted in his True Wealth newsletter, SLW has a solid fundamental picture driving this uptrend. The technical picture is firming up as well. It's time to be long SLW.

Baltic Dry Index Signals Renewed Market Decline

Much has been said about the Baltic Dry Index over the course of the last four years, especially in light of the credit crisis and the effects it has had on the frequency of global shipping. Importing and exporting has never been quite the same since 2008, and this change is made most obvious through one of the few statistical measures left in the world that is not subject to direct manipulation by international corporate interests; the BDI. Today, the BDI is on the verge of making headlines once again, being that is plummeting like a wingless 747 into the swampy mire of what I believe will soon be historical lows.

The problem with the BDI is that it is little understood and often dismissed by less thoughtful economic analysts as a “volatile index” that is too “sensitive” to be used as a realistic indicator of future trends. What these analysts consistently seem to ignore is that regardless of their narrow opinion, the BDI has been proven to lead economic derision in the market movements of the past. That is to say, the BDI has been volatile exactly BECAUSE markets have been volatile and unstable, and is a far more accurate thermometer than those that most mainstream economists currently rely on. If only they would look back at the numbers further than one year ago, they might see their own folly more clearly.

Introduced in 1985, the Baltic Dry Index first and foremost is a measure of the global shipping rates of dry bulk goods, mostly consisting of vital raw materials used in the creation of other products. However, it is also a measure of demand for said materials in comparison to previous months and years. This is where we get into the predictive nature of the BDI…

In late 1986, for instance, the BDI fell to its lowest level on record, then, began a slow crawl towards moderate recovery, just before the Black Monday crash of 1987.

Coincidence? Not a chance. From 2001 to 2002, a similar sharp collapse in the BDI preceded a progressive drop in the Dow of around 4000 points, ending in a highly suspect (Fed engineered) illegitimate recovery. In 2008, the index fell to near record lows once again just before the derivatives and credit crisis hit stocks full force. To imply that the BDI is not a useful measure of future economic trends seems like an astonishingly ignorant proposition when one examines its very predictable behavior just before major financial downturns.

This is not to suggest that the BDI can be used as a way to play the stock market from day to day, or often even month to month. MSM analysts rarely look further than the next quarter when considering any financial issue, and that is why they don’t understand the BDI. If an index cannot be used by daytraders to make a quick buck in a short afternoon, then why bother with it at all, right? The BDI is not an accurate measure of the daily market gamble. It is, though, an accurate measure of where markets are headed in the long run and under extreme circumstances.

Over the course of the past month, the BDI has fallen around 65% from above 1600 to 726. Mainstream economists argue that the BDI’s fall in 2008 was a much higher percentage, and thus, a 65% drop is nothing to worry about. They fail to mention that shipping rates never recovered from the 2008 collapse, and have hovered in a sickly manner near lows reached during the initial credit bubble burst. By their logic, if the BDI was at 2, and fell to 1, this 50% drop should be shrugged off as inconsequential because it is not a substantial percentage of decline when compared to that which occurred in 2008, even though the index is standing at rock bottom. Yes, the useful idiots strike again…

Looking at the rate and the speed of decline this past month, it’s hard to argue that the current 65% drop is meaningless:

Another subversive argument against the BDI is the suggestion that it is not the demand for raw materials that is in decline, but the number of shipping vessels out of use that is growing. A smart person might suggest that these two problems are mutually connected. An MSM pundit would not.

In 2008, many ships were left to wallow in port without cargo, but this was due in large part to two circumstances. First, demand had fallen so much that too many ships were left to carry too little raw materials. Second, credit markets had sunk so intensely that many ships could not find trade financing necessary to take on cargo. In either case, the BDI still falls, and in either case, it still signals economic danger. The only way that the BDI could signal a major decline in shipping demand artificially or inaccurately is if a considerable number of ships under construction were suddenly released onto the market while there is no demand for them. There have been no mass increases or extreme changes in cargo fleets this past month, or at all since 2008, which means, the BDI’s decline has NOTHING to do with the number of ships in operation, and everything to do with decline in global demand.

What is the bottom line? The stark decline in the BDI today should be taken very seriously. Most similar declines have occurred right before or in tandem with economic instability and stock market upheaval. All the average person need do is look around themselves, and they will find a European Union in the midst of detrimental credit downgrades and on the verge of dissolving. They will find the U.S. on the brink of yet another national debt battle and hostage to a private Federal Reserve which has announced the possibility of a third QE stimulus package which will likely be the last before foreign creditors begin dumping our treasuries and our currency in protest. They will find BRIC and ASEAN nations moving quietly into multiple bilateral trade agreements which cut out the use of the dollar as a world reserve completely. Is it any wonder that the Baltic Dry Index is in such steep deterioration?

Along with this decline in global demand is tied another trend which many traditional deflationists and Keynesians find bewildering; inflation in commodities. Ultimately, the BDI is valuable because it shows an extreme faltering in the demand for typical industrial materials and bulk items, which allows us to contrast the increase in the prices of necessities. Global demand is waning, yet prices are holding at considerably high levels or are rising (a blatant sign of monetary devaluation). Indeed, the most practical conclusion would be that the monster of stagflation has been brought to life through the dark alchemy of criminal debt creation and uncontrolled fiat stimulus. Without the BDI, such disaster would be much more difficult to foresee, and far more shocking when its full weight finally falls upon us. It must be watched with care and vigilance…

Ralph Acampora: Stocks Headed For Higher Ground; Blue Chips Breaking Out

Ralph Acampora

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.

A Potential 30%-50% Gain in Mining Stocks

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 [2].

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 [3] of copper in London Metal Exchange warehouses is at a three-year low. That's incredibly bullish [4] 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 [5]. The U.S. economy remains on the ropes. Some market [6] forecasters even say a depression [7] 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 [8] 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 [9]. 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.

Don Yacktman: How He Beats the Overall Stock Market

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.

Time to Ride the Commodity Bull

Long time readers know that I am a long-term commodity bull. Moreover, I have been writing on the theme of global healing for a few weeks. Despite last week's disappointing US GDP report, I am seeing signs that it may be time to get on the commodity bull for a ride. Both sentiment and momentum indicators are lining up for another upleg in commodity prices.

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.

CRB Large Spec
CRB Large Spec

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:

US economy picks up steam
US economy picks up steam

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:

Chart of the Day - Old Dominion Freight Line (ODFL)

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.


VIX Still Priced For Depression Risk


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)

Learn These 4 Profitable Chart Patterns

If you’re just starting out as a trader, the sheer number of technical analysis [2] 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 [3] 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 [4]

First up is the ascending triangle, a bullish [5] pattern that’s formed by a horizontal resistance level to the upside, and uptrending support below shares [6]. 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 [7] opposite of the ascending triangle is a descending triangle [8]. In a descending triangle, shares have horizontal support and downtrending resistance. The shorting signal comes when that horizontal support level [9] gets broken.

2. Head and Shoulders [10]

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 [11]

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 [12] 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 [13] other, more unconventional setups than traders who resort to rote memorization.