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Dr. Copper's Diagnosis: A Strong Recovery - Outside View

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Dr. Copper's Diagnosis: A Strong Recovery
Jul 31, 2010

As stocks have slipped lower over the last three months, copper has bucked the broad trend and broken the pattern of lower highs and lower lows it set in the spring.

After bottoming on June 7, the iPath Dow Jones-UBS Copper Subindex Total Return ETN - which closely tracks copper futures - has gained more than 12.2%. In the same span, the Russell 2000 small cap stock index has lost 0.6%.

The red metal is nicknamed Dr. Copper for its ability to peer around the corner and act as a leading indicator for the global economy. And right now, the commodity with a Ph.D. in economics seems to be saying the future looks bright. Is the trend set to continue? On a technical basis, looking just at price, analysts at Standard Chartered Bank believe copper will continue to move higher. They point to the formation of an "inverse head-and-shoulders" pattern. This pattern reflects the psychology of traders: The rebound from the initial low is quickly reversed, sending sentiment into a tailspin. The retouch of the "neckline" encourages short sellers to press their luck, but buyers are found lying in wait.

Source: Yahoo Finance

A break up and out of the pattern is a very positive signal that the selling pressure has been exhausted, clearing the way for bargain hunters to send prices skyward. Analysts at Merrill Lynch are looking for copper prices to increase another 18% through 2011 as the economic recovery rolls on.

Fundamentally, copper still faces tightening supply and growing demand. Credit Suisse Group AG analysts have reinforced their view that copper is their top base metal pick with "falling ore quality grades and tight supplies causing long-term prices to rise again."

After looking at the rate of copper imports into China, it looks like the Chinese are drawing down their stockpiles of the metal - a sign that demand from the Middle Kingdom is set to rise as these inventories are replenished.

Copper's relative strength is a sign that some positive sentiment is creeping back into the psyche of global traders. Mining stocks will benefit from its advance, and so will the iShares MSCI Chile Investable Market Index fund, as copper mining makes up a large part of the Chilean economy. ECH hit an all-time high last week.

This article is authored by Jon D. Markman. Jon is a frequent contributor to Money Morning and has a unique view of both the world economy and the global financial markets. With uncertainty the watchword and volatility the norm in today's markets, low-risk/high-profit investments will be tougher than ever to find. And Jon has been the seasoned guide to uncover those opportunities.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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