CAN COPPER WEIGH DOWN THE ECONOMY AND STOCKS ? / BARRON´S GETTING TECHNICAL ( VERY HIGLY RECOMMENDED READING )

Getting Technical

 

WEDNESDAY, MARCH 30, 2011

 

Can Copper Weigh Down the Economy and Stocks?

 

By MICHAEL KAHN 

 

The industrial metal that presages economic activity like no other is sporting lousy technicals.

A rising stock market suggests better economic activity is expected several months down the road. But industrial metals, specifically copper, do not seem to agree.

The price of copper is considered to be a "tell" for the economy due to its correlation with future economic activity. Although it has rebounded from February weakness and a sharp decline in early March, copper has not made it back to new high ground.

In contrast, most broad stock-market indexes are within a day's trading of their respective 2011 highs.
To be sure, the U.S. dollar has rebounded a bit to create headwinds for commodities of all types. But one look at the chart of copper and we can see technical damage from the decline still in place. The iPath Dow Jones UBS Copper Subindex Total Return ETN (ticker: JJC), an exchange-traded note tracking copper prices, has not only moved below its rising trendline from last May but has also come back to "test" that breakdown (see Chart 1).

Chart 1

iPath DJ UBS Copper ETN

In technical jargon, a test of a breakdown is simply the return by the market to the scene of the crime. After a technical breakdown, its rallies back touch the former pattern again. In this case, the ETN tested the now-broken trendline before falling anew. Bears who missed the first opportunity to sell this market did not miss their second chance, swelling supply and pushing prices back down.

Two weeks ago, I wrote here that industrial commodities from nickel to tin were also on the weak side (see Getting Technical, "The Correction Is Well Underway," March 16, 2011). While I underestimated the resilience of the stock-market bulls and some of the industrial metals, it is copper that we really should watch. Indeed, just after the tsunami devastated the Japanese countryside, copper soared in price as investors assumed the demand from the pending rebuilding process would jump.

The copper ETN has already given up more than half the gains it made from its March 15 low. The initial surge seems to have been a diversion from the overall technical breakdown now in place.

Copper-mining stocks are lagging the market. The Global X Copper Miners ETF (COPX), an exchange-traded fund comprised of copper miners, has lagged the market all year (see Chart 2). This is true whether we use the Standard & Poor's 500 or the MSCI EAFE Index tracking Europe, Australasia and the Far East as the benchmark.

Chart 2

Global X Copper Miners ETF

Copper stocks do present a mixed bag on an absolute basis. Big miners such as BHP Billiton (BHP) are showing strength this week, but Southern Copper (SCCO) has been in decline for four months (see Chart 3). Not only is the trend down but March trading tested the February support break.

Chart 3

Southern Copper

There is even a mixed picture within bellwether stock Freeport-McMoRan Copper & Gold (FCX). As its name suggests, it has both copper and gold interests, but it seems to track more closely with copper miners. It peaked in December and broke down below its rising trendline drawn from last June (see Chart 4).

Chart 4

Freeport-McMoRan Copper & Gold

We can argue that the trendline is now being tested. But one look at the chart shows it to be quite far below its peak price. In other words, it is lagging the market, despite a decent March rebound.

The bottom line is that copper and copper-mining stocks are lagging the market. Some copper stocks are on their way toward full recovery and some are not, and that suggests the commodity is a bit more skeptical about the recovery than the overall stock market may be.

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Michael Kahn, mutual fund co-manager, author of three books on technical analysis, former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, also blogs at www.quicktakespro.com/blog.

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