LUMBER NEARS MAJOR BULLISH BREAKOUT -- THAT SHOULD BENEFIT GUGGENHEIM TIMBER ETF -- TIMBER STOCK LEADERS ARE WEYERHAEUSER, INTERNATIONAL PAPER, AND MEAD/WESTVACO -- RISING CHINESE STOCKS INCREASE DEMAND FOR COAL STOCKS WHICH ARE ALSO RALLYING
LUMBER NEARS MAJOR UPSIDE BREAKOUT... Lumber prices surged yesterday after the devastation on the east coast. [I live in New Jersey which was hit especially hard]. There's a lot of rebuilding that's going to be needed as a result And that's going to require a lot of lumber. Lumber has in fact been rising over the last year as the housing industry has recovered. Chart 1 shows a positive correlation between the price of lumber and Dow Jones Home Construction iShares (green area) over the last four years. The homebuilding index bottomed last October and has since risen to the highest level in four years. That also began a strong rally in the price of lumber (see arrows). Chart 1 also shows lumber on the verge of breaking out of a large "ascending triangle" pattern. [An ascending pattern is identified by a flat upper line and a rising lower line and is usually a bullish pattern]. The improvement in housing and this week's east coast damage should combine to make the price of lumber a lot more expensive. One way to participate in that rally is to buy lumber futures. Another way is to buy stocks tied to lumber.
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Chart 1
GUGGENHEIM TIMBER ETF NEARS BULLISH BREAKOUT... The Guggenheim Timber ETF (CUT) is an index that includes 31 stocks of global timber companies. Most of those stocks (35%) are based in the U.S. The CUT is very influenced by the price of lumber. Chart 2 compares the price of lumber (solid matter) to the Timber ETF (black line) over the last two years. The chart shows that timber stocks usually do better when the price of lumber of rising. The chart also shows the CUT testing overhead resistance formed this spring. An upside breakout in lumber (which appears likely) would greatly increase the odds for an upside breakout in the Timber ETF. Chart 3 shows the CUT testing its March high at 19.27. A decisive close over that resistance barrier would complete a bullish "double bottom" reversal pattern. The brown line is a relative strength ratio of CUT divided by the S&P 500. That ratio has been rising since June which shows new market leadership in timber stocks.
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Chart 2
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Chart 3
WEYERHAEUSER, INTERNATIONAL PAPER, AND MEAD/WESTVACO ARE TIMBER LEADERS... Three of the biggest U.S. stocks in the Timber ETF have achieved or are very close to major upside breakouts. Chart 4 shows Weyerhaeuser (WY) in the process of testing its previous record high formed during 2007. An upside breakout to new record ground appears likely. Its relative strength line (below chart) has been rising all year and is near a record high as well. Chart 5 shows International Paper (IP) recently climbing above previous peaks around the 35 level. That puts IP at the highest level in 12 years. Its RS line (below chart) has reached a seven-year high. Chart 6 shows Mead/Westvaco (MWV) having broken through its 1999 high to reach a new record. Its RS line (below chart) is near a record high as well. All three stocks should benefit from rising lumber prices.
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Chart 4
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Chart 5
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Chart 6
COAL STOCKS HOLD THEIR RECENT GAINS ... Two weeks ago (October 18), I showed an upside breakout in a few leading coal stocks that appeared to have bottomed. Two of them are shown again below. Chart 7 shows Peabody Energy (BTU) consolidating above its 200-day average. Its relative strength line (below chart) has turned up as well. Chart 8 shows Consolidated Energy (CNX) with an even stronger chart pattern. CNX not only cleared its 200-day line, but reached the highest level in eight months. Its relative strength line is rising as well. One of the factors that may be helping coal stocks (and other basic materials) is the recent upturn in the Chinese stock market.
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Chart 7
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Chart 8
RISING CHINESE STOCKS ARE GOOD FOR COAL... Three weeks ago (October 11) I showed Chinese iShares (FXI) achieving a bullish breakout above their March high. Chart 9 shows the FXi now trading at the highest level in eight months. It has also broken a resistance line drawn over its 2011/2012 highs. That's a good sign for global stocks and especially those tied to basic materials. That's because China is the world's biggest buyer of basic materials, including coal. Weakness in Chinese stocks (and economy) has dampened demand for natural ressources. An upturn in Chinese stocks should serve to strengthen that demand. Chart 10 shows a strong visual correlation between Chinese iShares (red line) and Consolidated Energy (black line) over the last two years. After weakening together during the first half of the year, both have been rallying together since mid-year. A stronger China is good for coal and host of other basic materials -- and stocks tied to them.
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Chart 9
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Chart 10
SILVER STOCKS BREAK OUT ... Last Thursday's message showed two silver stocks nearing upside breakouts. Those bullish breakouts are taking place. Chart 11 shows Coeur D Alene Mines (CDE) trading over 31 today for the first time in eighteen months (see circle). Chart 12 shows Silver Wheaton (SLW) trading above 41 for the first time in more than a year. Both relative strength lines (below charts) have turned up as well. As I suggested last week, silver stocks remain the strongest part of the precious metal universe. That also bodes well for gold stocks and precious metal prices.
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Chart 11
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Chart 12
DOW AND NASDAQ BOUNCE FROM CHART SUPPORT... With foreign stocks leading the way, U.S. stock indexes are bouncing off important support levels. Chart 13 shows the Dow Industrials finding support just above 13000 (its late August low) and its 200-day moving average (red arrow). . Chart 14 shows PowerShares QQQ Trust finding support at 65. That level is important for two reasons. First, it represents a test of the support line drawn over the July highs. Second, it represents a test of the 200-day average. The 14-day RSI line (below chart) also appears to be stabilizing near oversold territory (see arrow). Assuming this is just a temporary correction (which I strongly suspect), this is where U.S. stocks should start to regain their footing.
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Chart 13
