COMMODITIES STILL IN LONG TERM UPTREND - CHARTING COMMODITY MUTUAL FUNDS -- GOLD STOCKS ARE UP -- FCX BENEFITS FROM RISING COPPER AND GOLD

END OF 20-YEAR BEAR MARKET... In my recent Intermarket Analysis book (and in several market messages from last year), one of the subjects I discussed was the re-emergence of commodity markets from a twenty-year bear market and their relative appeal as an asset class. That case is made pretty clear by the long-term chart of the CRB Index (Chart 1). There are three main trends visible on the 30-year chart. The first is the major uptrend of the 1970s that ended in 1980 . That major commodity peak was followed by a 20-year period of falling commodities. During that span, bonds and stocks were the preferred asset classes. Following a major "double bottom" that formed from 1998 to 2002 (see circles) commodities embarked on another major uptrend which is still intact. These are not short-term trends. The 1970s bull market lasted for most of that decade. The bear market that started in 1980 lasted more than two decades. That being the case, it seems reasonable to assume that the current bull market has much longer to run. Chart 1 does show, however, that the CRB Index has stalled at its early 1984 peak (at 280) and has spent most of this year in a consolidation pattern. That consolidation, however, has not disturbed the long-term uptrend.

Chart 1

COMMODITIES HAVE BEEN STRONGEST ASSET CLASS... Chart 2 shows the 1998/2002 double bottom in the CRB Index more clearly and shows the major upside breakouts that have taken place since then. The first one took place at the start of 2003 (see first arrow) and the second at the start of 2004 (second arrow). Notice that in both cases, the CRB Index has remained above the breakout point, which is a sign of a continuing uptrend. Plotted above the CRB chart is a ratio of the CRB divided by the S&P 500. It shows that commodity prices have outperformed stocks since 1999 (although stocks have done better since the start of 2003). Commodities have done even better relative to bonds over the last five years. Those are two good reasons to include commodities (or commodity-related stocks) in one's portfolio. There are several ways to accomplish that.

Chart 2

COMMODITY MUTUAL FUNDS ... There are two commodity mutual funds that allow investors to invest directly in commmodity markets -- the Oppenheimer Real Asset Fund (Chart 3) and the Pimco Commodity Real Return Strategy Fund (Chart 4). The Oppenheimer Fund is trading over its 50-day average while the Pimco Fund is just starting to bounce off its 200-day line. The reason why the Oppenheimer Fund looks stronger is that it's based on the Goldman Sachs Commodity Index which has a heavier energy weighting. The Pimco Fund appears to have a closer correlation to the CRB Index (Chart 5). Another way to participate in the commodity bull market is via mutual funds (or ETFs) that specialize in basic materials, natural resources, or precious metals. Energy strength has dominated the news lately. Let's revisit the metals markets.

Chart 3

Chart 4

Chart 5

XAU CLIMBING AGAIN ... I've written several bullish reports on gold stocks since the start of the year. The last was on August 20 when gold had broken out to a new four-month high and the Gold (XAU) Index had climbed over its 200-day line. Since then, gold has pulled back and the XAU has been consolidating just below its 200-day line. Gold has rebounded back up to $410 and gold stocks may be on the move again. Chart 6 shows the XAU trading back over its 200-day line. The odds of an upside breakout look pretty good. Notice that the recent pullback stayed over the breakout point at 92. That a sign of strength. The weekly bars in Chart 7 are also positive. They show the XAU having broken its 2004 down trendline. In addition, the weekly RSI line has moved over 50 and the weekly MACD lines are positive. On relative strength grounds, gold stocks are among the market's strongest groups over the last three months.

Chart 6

Chart 7

BUYING A COPPER AND GOLD STOCK ... One of the better performing XAU stocks is Freeport McMoran Copper & Gold. Its relatively strong performance may be due to the fact that it benefits from gains in both commodities. While gold is within $5 of a new recovery high, copper is challenging its summer high and appears to be on the verge of a bullish breakout. Chart 8 shows that FCX has already exceeded its 200-day average. Its relative strength line (plotted under the chart) has already broken through the down trendline starting last December. That looks like a winning combination. With everyone focused on energy, this appears to be a good time to do some prospecting in the metals area.

Chart 8