ALCOA STRENGTH REFLECTS STRONG MATERIALS GROUP -- RISING INDUSTRIAL METALS BREAK SIX-YEAR DOWN TRENDLINE -- DEFLATION HAS GIVEN WAY TO REFLATION
ALCOA GAINS ON STRONG EARNINGS... A strong earnings report last night boosted Alcoa today and made it day's strongest Dow stock. Chart 1 shows the big aluminum stock climbing on rising volume today. The stock isn't too far from a new 52-week high. The rising relative strength line shows that AA has also been outperforming the Dow since July 21. Rising industrial prices have been producing superior returns in basic material stocks, and industrial metals in particular. This includes aluminum, copper, and paper. Today's action was reflective of that trend. The top gainers in the materials group today were Alcoa, Boise Cascade, Freeport McMoran Copper & Gold, Louisiana Pacific, and Phelps Dodge. With the market dropping today, the only market sector to end up in the black was Basic Materials. Chart 2 shows the Materials Select Sector SPDR hitting a new three-week high today in the face of a falling stock market. Its rising relative strength shows it outperforming the S&P 500 since July.
Chart 1
Chart 2
PHELPS DODGE HAS BEEN STRONGER THAN ALCOA... While Alcoa and Phelps Dodge have been market leaders, Phelps Dodge has been the stronger of the two. That can be seen by comparing Charts 3 and 4. Phelps Dodge has climbed to the highest level in nearly three years. That's reflective of a rising copper market. Freeport McMoran has been even stronger than AA or PD.
Chart 3
Chart 4
FREEPORT MCMORAN COPPER & GOLD HITS RECORD HIGH... Charts 5 and 6 compare the monthly charts of Phelps Dodge and FCX. While both stocks are strong, Freeport is by far the stronger of the two. FCX is benefiting from rising copper and gold prices. [Gold stocks also closed higher today]. FCX has just broken through its 1996 to reach a new record. That's reflected in a very strong relative strength line. The fact that industrial metals are so strong carries a positive message for the global economy.
Chart 5
Chart 6
INDUSTRIAL METALS BREAK SIX-YEAR DOWN TRENDLINE... Chart 7 is a fascinating chart and carries a lot of meaning. The most obvious is that industrial metals prices have broken a six-year down trendline extending back to 1997. You may recall that the year 1997 was the start of the Asian currency crisis, which pushed commodity prices lower all over the world and signalled the start of a deflationary problem and global economic weakness. That's because the direction of industrial metals is a good barometer of the state of the global economy. That's why the new upturn carries good news. The bad news is that there's a close correlation between industrial metals and long-term interest rates. That supports the view that long-term rates have bottomed and are probably headed higher. That's bearish for bonds. The chart also suggests that the deflation threat that started in 1997 has run its course. Reflation is the new game. The best way to capitalize on that is to be in stocks tied to rising commodity prices. That includes aluminum, copper, gold, paper & forest products. Higher commodity prices are also a side-effect of a falling dollar.
Chart 7
