Copper Earns Doctorate in Economics

Volume 2, Issue 3

THERE HAVE BEEN A HOST OF IMPROVEMENTS SINCE THE NOV. 21 LOWS, BUT THE ACTION OF FINANCIAL STOCKS IS THREATENING TO CHANGE THAT. THIS COULD BE A SUCCESSFUL RETEST OF THE NOVEMBER LOWS. SELL SIGNAL FOR EURO AND CAD$.

Looking back to 2008, most all investments fell in September and reached a low on Oct. 10. After a rally into the US election, prices declined even more, to reach lower lows six weeks later on Nov. 21, 2008. After that day, equity markets, currencies, the Volatility Index, the Libor Rate and commodity prices improved in a meaningful way into early 2009. However, since Jan. 5, news of major losses by US and European financial firms caused major declines in their spare prices, which, in turn, have dragged equity markets lower.

If you understand how markets act, you will realize that market prices often retest important lows six to eight weeks later. For instance, the Nov. 21 lows occurred exactly six weeks after Oct. 10 lows. Since the lows, in many cases, were much lower on Nov. 21, than they were on Oct. 10, it is very possible that the declines in the last two weeks is part of the process of retesting the Nov. 21 lows, to see if they will hold. Jan. 23 is eight weeks after Nov. 21 so this is the time frame when a retest should occur if it was going to. Equity markets, the Volatility Index, Libor rate and some commodity prices are significantly better than they were on Nov. 21. Financials, oil and currencies are near or below the lows of two months ago. Therefore, while Nov. 21 low was a retest of of the October lows, this current correction has the potential to be a successful retest of the Nov. 21 lows.

 

What is important on these oscillator charts are the olive colored and pink lines. The red and green lines show where the respective asset is trading at, which, in this case, is the US SP 500 Index. You can see that the oscillator (olive line) is pausing and turning down slightly. If this turns down by next Monday it will suggest that the uptrend is over. You can see that the Index is higher than it was at November lows. There have also been more issues advancing than declining since December for the first time since September.

While equity and debt prices declined in September 2008, the worst of the declines occurred in October and November. If equity markets and debt prices can continue to hold on to the gains made since November, the steep losses now reported by some of the US and European financial firms for the final quarter of 2009 could be the worst of the bad news.

In summary, the markets are at an important juncture. The rally since November could be coming to an end. On the other end, this could be the final phase of a brief correction that successfully retests the November lows, which should usher a powerful rise. The indicators are mixed, but with a positive bias. For example, the Volatility Index was close to 80 on Oct. 10 and Nov. 21, now it is at 54. The rate that banks charge each other over government guaranteed rates peaked at 4.3% on Oct. 1, fell to 2.14% on Nov. 21 and is 1.03% now. While the financials were making new lows, many other sectors and most global equity markets are much higher than they were in November. See the charts below. Market action in coming days should present a clearer picture of future trends. I will continue to do my best to show you where the money is flowing during these historic times. (Markets usually fall on Inauguration Day.)

Bonds – US bond yields reached a low on Dec. 18 and have been trending higher. These yields fell when equities reached the lows in October and November. There is not the fear and flight to quality like there was during previous lows in the financials. Could this be the last gasp of the flight to quality trade?

Commodities – They say copper has a PhD in economics. Indicators show that copper prices are improving and that the trend for gold is still up. The outlook for oil is mixed.

Currencies - The indicators for the euro vs. USD and CAD$ vs. USD have turned negative issuing a sell.

 

The long-term oscillator for the US Banking Index, which represents US financial stocks, has turned down after only a brief rise from the previous oversold low. The dark green line above shows that the Banking Index continues to hit lower lows which is casting a shadow over all stocks in general. Equity markets cannot stay strong very long if the financials are weak. There has been such a severe sell off that a move to the upside for at least a few days is over due. The BKX is down 20% just today!

 

The Canadian TSX Index on the other hands is looking more positive. Canadian banks are in a much stronger position than the US banks but their share prices follow the trend of the US counterparts. The TSX and some other global markets are still much higher than the November lows compared to the US.

 

The short-term trend charts for the US markets turned negative a week ago and today the TSX finally followed suit. It is usually prudent to wait for three negative days because it can change intraday or with one or two up days which could happen anytime since there have been so many down days since Jan. 5.

 

Money is not flowing into government bonds like it has during other equity sell offs. The long-term oscillator has turned down indicating weakness for bonds. A sell signal for government bonds was issued Jan. 12, 2009.

 

Experts say that copper has a PhD in economics because it is used in so many products that it becomes a good barometer of economic activity. It is interesting to see that copper prices have improved since last December. The cost of transporting goods by ship (as determined by the Baltic Dry Freight Index) has risen 33% from a very depressed low reached on Dec. 5. These are some of the positive signs that were not occurring in October or November.

 

The long-term oscillator for gold is still in an uptrend but gold prices have reached lower highs since the collapse of Bear Stearns in March 2008.

 

The outlook for oil prices is mixed. The long-term oscillator seen here is rising which is positive. However, the short and long-term charts are negative. It could be forming a base here and retesting the December lows.

 

The euro vs. yen is a barometer of the willingness of global investors to assume risk. The long-term oscillator has turned down once again as the green line above shows the euro falling to the same lows reached in previous months. It would be positive if it can hold near these lows once again.

 

The long-term oscillator for the euro has also turned down after a strong rally peaked in late December. The US$ and the yen have reached highs when equities have reached lows. If the euro can hold near previous lows during coming days it will be positive. If they cannot, it will be negative. There has already been a sharp decline for many days so markets are due for at least a bounce. Market action this week is significant.