Commodities Stocks: Trouble
or Opportunity?
Bruce Zaro
May 17, 2005
In his 2003 book, Adventure
Capitalist, famed investor Jim Rogers reiterated his prediction
of a long and profitable run for commodity-based investments.
That turned out to be a bold call, as commodity prices, as measured
by the Commodity Research Bureau Index (CRB) had been flat to
down over the previous 10 years and had barely stirred in over
20 years. Looking back to 2003, this index was far below its
long-term trend of lower peaks, rendering the index essentially
stagnant since 1985. This, of course, roughly corresponds to
the wringing out of inflation pressure in the US and around the
globe over that period.
While world financial markets adjusted to this new inflation
quashing mentality with euphoria, Rogers spells out the downside
(and his opinion of current opportunity) from that long period
of under-investment. The bullish case, he says, is based on simple
economics: little investment in raw-materials capacity over the
past 10 to 15 years plus growing demand - especially from big
emerging Asian economies, such as India and China - has resulted
in higher prices. Indeed, the pricing of certain commodities
can be particularly telling in taking the pulse of global economies,
most notably copper, steel and semiconductors. Among the industrial
sectors that hold additional clues are trucking and transport,
machinery, chemicals and forest products. As sector trend watchers,
it's no surprise that our individually managed portfolios are
over-weighted by many names in this area. Recently, however,
we have been taking profits and tightening up our stop loss points
on these. Indeed, some of the best performing market sectors
of 2004 and first quarter of 2005 have been Steel (up 90% in
2004), Transports (up 30% over the same period), Chemicals (up
22%) and, of course, Oil and Oil Services, up 35% each in '04
followed by advances of 21% and 12%, respectively, in the first
quarter of 2005.
But where does that put trend-watching basic materials investors
now? What should their strategy be? Is this a good time to initiate
positions if one has missed the ride of the last 5 quarters?
Are Jim Rogers's predictions in danger of fizzing out?
Truckers:
The trend line of Truckers
index started its current uptrend in October 2000, with the market
still dealing with the reality of a March 5100 NASDAQ print.
Yet something was stirring in the truckers. Since the start of
the up trend it has never really come close to violating the
support line. But recent action is cause for concern. A 420 top
in March has been followed by a triple bottom break at 364, a
lower top and another break at 348. Certainly, on the way up
this can be seen as confirming an economy recovery as far as
the shipping companies are concerned. But what's the next move?
Stay tuned. The first buyer signal off the bottom was a recent
breakout at $368. Now, a pullback could present attractive risk/reward
potential with the second possible buy signal coming at $376.
Such buyers, however, should keep in mind that the support line
is well below at 292.
Dorsey Wright & Associates
DJ Trucking Index:
Steel:
This index doubled
as it became fashionable to quote "China will need the equivalent
of all the steel in New York City every year for 20 years."
Someone forgot to add that China might actually become a net
exporter along the way, as is the case possibly now. Recent steel
industry figures show demand staying steady, but supply and inventory
increasing. Well, this chart had been confirming the China/Manhattan
to the moon theory until recently. Now, however, it's threatening
to violate its support line at 184, taking it back to its October
2004 low. The recent breach of the trend line at 180 is not to
be taken lightly, in our opinion as it was a trend line that
had been intact since May of 2004 while the index doubled. We
can comfortably say steel stocks likely have some work to do
before resuming their uptrend (resistance line now overhead at
240), let alone the prospects for a new Manhattan in China every
year. We urge caution here and think this is a group best left
to aggressive bottom fishers.
SIG Steel Producers Index (STQ):
Coal:
Accounting for more
than a third of the electricity produced worldwide, coal has
certainly participated in Rogers' commodity theme. The Coal Producers
Index rose 3-1/2 fold from late 2002 till March of 2005- from
100 to 348. While it has since broken a bearish triangle and
took out a number of support levels, this sector ended up bouncing
from near the bottom of its expected 10 week trading range. The
break at 304, if accompanied by a subsequent pullback sets up
a very bullish scenario with a spread triple top break at 316.
While any entries will need to be monitored closely, very good
risk/reward potential seems to be shaping up in this group.
Dorsey Wright & Associates
Equal Dollar Coal Index:
Most of the aforementioned indices are in deep pullbacks as investors
sort out their next moves. It's typical that the market's best
performing sectors tend to have sharp, short downdrafts that
are followed by a resumption of up, up and away. This remains
a possibility in many of the base materials sectors, but would
be less likely in sectors whose trends have more decisively changed
from positive to negative (and violated trend lines), like Steel.
Similar patterns can be seen in Chemicals and Copper. As a general
strategy, we typically like to see buy signals off the bottom
before we would start to re-enter some of these sectors. We further
suggest paying close attention sector relative strength as it
can be an early signal of a change in trend.
If Jim Rogers is correct and this trend has a long way to go,
then the recent weakness may just be a blip on the radar. Our
confidence would increase in this call, however, if and when
we observe the supply of buyers returning to these areas, and
the supply of sellers drying up. We will see this happening plainly
as new columns of buyers (X's) on our point and figure charts.
Please feel free to contact us for further discussion on favored
stocks within these sectors.
May 13, 2005
Bruce Zaro
Chief Technical Strategist
Delta Global Advisors, Inc.
800-485-1220
email: bzaro@deltaga.com
Over his 20-year
investment career, Mr. Zaro has become a highly-regarded technical
analyst who runs private client portfolios at Delta Global. For
the last year he served as Managing Director of Granite Wealth
Management outside of Boston and spent nearly 15 years prior as
a Vice President at Gage Wiley & Co. His current firm is full-service,
but specializes in providing international market access as well
as alternative investment strategies.
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