A Short-Term Turn in the Market?

Yesterday the S&P 500 hit 870 twice: at 12:00 and again at 2:00 Eastern. It held both times and ended the day at 879. 870 - 875 had been the S&P 500 target for weeks as the bottom of a trading range. So, the fact that it held, not once, but twice, is very encouraging. This forms a technical formation called a double bottom, which only means that an important level was tested by traders more than once. The market trading bears didn't have enough selling power to push the index through that level for now. Any good earnings news like the better-than-expected Alcoa results yesterday will give the bulls more encouragement and may force out the bears at some point.

I noticed that all the cyclical / materials stocks were moving exactly with the S&P 500 all day Wednesday. This is an indication that materials and energy are a proxy for economic recovery. When the market feels the prospects for the economy become better, deep cyclicals and materials move higher. So FCX made a bottom at around $43.50 at both times and SU made a bottom at around $25.75. For both high beta stocks, they are off by more than 20% in the past two weeks, which means they are in their own mini-bear markets. (FCX is off over 30% from its June high).

So, is this a good time to buy? The long term thesis is inflation to correct the Federal deficits and pay for growth in money supply / weakened dollar. Commodities / materials are the best way to play that move. But is now the time?

I am waiting as there is a lot of downside momentum in oil and basic metals (copper). Many traders (probably too many for a contrarian like me), feel that oil is headed to $50. But industry experts tell us that any price below $70 today will shut down supply, leading to higher prices at some point as demand exceeds supply. I have small positions in energy (SU, PWE and UNG) but am out of basic materials (I normally use FCX and BHP). If the S&P 500 gets back above 900 with some conviction as shown by volume, I will consider adding to the above positions. I hope I can put money back in by next week.

Disclosure: No positions

Comments

[a. palmer jr.:]

The problem is, the S&P doesn't seem to be moving up much either. We've been at this bottom or close for quite a while now, I hope we're not talking about this a year or two from now.

Jul 10 10:01 AM

[Mad Hedge F...:]

Gotta go with FCX. One of my favorite stocks, and one of the great “tells” on the state of the global economy is Freeport McMoRan (FCX), the world’s largest copper and gold producer. CEO Richard Adkerson says it’s all about “China, China, China”, which has been frenetically stimulating it economy with a $586 billion reflationary package and rebuilding stockpiles of the red metal at a furious pace. The ongoing lifestyle upgrade in other emerging markets is adding to demand, and is the switch to hybrid cars in industrialized countries, which use two to three times more copper than conventional cars. Last year FCX mined 102 billion pounds of copper, 40 million ounces of gold, and 266 million ounces of silver. A doubling of copper prices since January enabled FCX to announce blowout earnings yesterday. The stock has tripled since my New Year recommendation at www.madhedgefundtrader.... If you want a core holding that is in many right places at the right time, use dips to back up the truck for FCX.

Jul 22 12:11 AM

[Brian McMorris:]

Mad Hedge....I go back and check some of my postings from time to time to see how my thinking turned out. We both had this post very right. I did not commit as aggressively to FCX as I should have (I can say that almost every time in hindsight), but I have played it a bit. Thought it was too expensive at $65 and got out and now it is over $80. But I am still long BHP. It seems to be a little less a trading toy as compared to FCX. My SU has done well, too, and I have played a little EWZ along the way. I am sitting on a big bunch of FLR. It should be moving in this commodity driven market as the No. 1 infrastructure and resource engineering company in the world, but is standing still, even though around 12 P/E and 25 ROE. I am patient with it and have a $65 target by year end. Hope you are having a great year!

Oct 22 12:03 AM

[Brian McMorris:]

Mad Hedge....I go back and check some of my postings from time to time to see how my thinking turned out. We both had this post very right. I did not commit as aggressively to FCX as I should have (I can say that almost every time in hindsight), but I have played it a bit. Thought it was too expensive at $65 and got out and now it is over $80. But I am still long BHP. It seems to be a little less a trading toy as compared to FCX. My SU has done well, too, and I have played a little EWZ along the way. I am sitting on a big bunch of FLR. It should be moving in this commodity driven market as the No. 1 infrastructure and resource engineering company in the world, but is standing still, even though around 12 P/E and 25 ROE. I am patient with it and have a $65 target by year end. Hope you are having a great year!


On Jul 22 12:11 AM Mad Hedge Fund Trader wrote:

> Gotta go with FCX. One of my favorite stocks, and one of the great
> “tells” on the state of the global economy is Freeport McMoRan (seekingalpha.com/symbo...),
> the world’s largest copper and gold producer. CEO Richard Adkerson
> says it’s all about “China, China, China”, which has been frenetically
> stimulating it economy with a $586 billion reflationary package and
> rebuilding stockpiles of the red metal at a furious pace. The ongoing
> lifestyle upgrade in other emerging markets is adding to demand,
> and is the switch to hybrid cars in industrialized countries, which
> use two to three times more copper than conventional cars. Last year
> FCX mined 102 billion pounds of copper, 40 million ounces of gold,
> and 266 million ounces of silver. A doubling of copper prices since
> January enabled FCX to announce blowout earnings yesterday. The stock
> has tripled since my New Year recommendation at www.madhedgefundtrader....
> If you want a core holding that is in many right places at the right
> time, use dips to back up the truck for FCX.

Oct 22 12:04 AM