METAL AND MINING STOCKS SHOW NEW STRENGTH -- STEEL LEADERS ARE AKSTEEL, NUCOR, AND STEEL DYNAMICS -- ALCOA AND FREEPORT MCMORAN COPPER & GOLD HAVE ALSO TURNED UP -- COPPER JUMPS TO EIGHT-MONTH HIGH -- RISING BALTIC SEA INDEX SUPPORTS HIGHER BOND YIELDS
METALS & MINING ETF TURNS UP ... Another sign of growing economic strength is recent buying of metals and mining stocks. These stocks usually do better when demand for industrial metals increases which is tied to a stronger economy. The weekly bars in Chart 1 show the S&P Metals & Mining SPDR (XME) trading at a new 10-month high after having broken a falling trendline extending back to mid-2011. Its relative strength ratio (gray matter) is just starting to turn up. The metal groups that have led that buying over the last six months have been steel, aluminum, and copper. But first a review of an earlier article of how and why that upturn started.
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Chart 1
BALTRIC DRY INDEX TURNS UP ... I wrote a message on September 12 entitled : "RISING BALTIC DRY INDEX REFLECTS INCREASE IN CHINESE DEMAND FOR NATURAL RESOURCES -- STEEL LEADERS INCLUDE AKSTEEL, NUCOR, AND STEEL DYMANICS ..." Chart 2 shows that since then the Baltic Dry Index ($BDI) has climbed to the highest level in three years. The BDI measures shipping rates for dry bulk commodities, which are mainly coal, iron ore, and grains. It is also a measure of global demand. After falling between 2010 and 2012, the BDI turned up during 2013 as global demand strengthened. The article suggested that the main demand was coming from China's need for iron ore, and that stocks that would benefit most from that were tied to steel.
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Chart 2
MARKET VECTORS STEEL INDEX HITS 11-MONTH HIGH... The September 12 message showed the Market Vectors Steel ETF (SLX) as it had just climbing above its 200-day moving average. At the same time, its relative strength ratio (gray area) was just starting to rise. Chart 2 shows the SLX now trading at the highest level since January. Its relative performance continues to rise as well. In fact, steel has been the strongest part of the basic material group over the last six months. The weekly bars in Chart 3 put the upmove in the SLX in better perspective. After bottoming during July (after a two-year decline), the SLX is now testing a previous high reached at the end of 2012 near 50. A close above that barrier would signal the start of a new uptrend. Chart 4 also shows that the steel group is still cheap relative to the rest of the market.
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Chart 3
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Chart 4
AKS, NUCOR AND STEEL DYNAMCIS SHOW STRONG PATTERNS... Three steel leaders were featured on September 12 and are updated here. The first was AKSteel (AKS) which has been the biggest steel percentage gainer over the last six months. The weekly bars in Chart 5 show AKS having surged to the highest level in nearly two years. Its relative performance has surged as well. At the moment, the steel leader is breaking through a down trendline drawn over its 2010/2011 highs. An even stronger chart pattern belongs to **Nucor (NUE). Chart 6 shows Nucor trading near a five-year high after exceeding its 2011 high earlier this year. The weekly bars in Chart 7 show Steel Dynamics (STLD) in the process of breaking above its 2011 intra-day peak near 19. That puts the steel stock at the highest level since 2008. US Steel (X) wasn't included in that earlier message. The weekly bars in Chart 8, however, show that steel laggard having just turned up as well.
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Chart 5
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Chart 6
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Chart 7
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Chart 8
"FREEPORT MCMORAN COPPER & GOLD JUMPS ON HOPES FOR MORE COPPER DEMAND..."... This is another part of the headline taken from the September 12 message when a chart of Freeport McMoran Copper & Gold (FCX) was starting to rise. [Despite its name, FCX is mainly a copper stock]. Although the stock has gained 15% since then, it still hasn't reached a 52-week high. The weekly bars in Chart 9, however, show the stock having broken a two-year resistance line. In addition, its 10-and 40-week moving averages have turned positive, and its relative strength ratio is rising. The copper stock appears to be in the early stages of a new uptrend. One of the things holding the stock back has been the flat price of copper. The daily line in Chart 10, however, show copper rising to a new eight-month high this week. [Recent signs of economic strength (and rising rates) are giving a boost to economically-sensitive commodities like copper and energy. By contrast, the combination of rising rates and a strong stock market are hurting gold].
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Chart 9
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Chart 10
ALCOA ALSO GAINS GROUND... The weekly bars in Chart 11 show Alcoa (AA) climbing to the highest level in nearly two years. Its relative strength ratio has been climbing as well. I suspect the aluminum stock is rising for the same reasons that copper and steel stocks are rising -- a stronger global economy and more demand for natural resources. Interestingly, commodity stocks often change direction before their respective commodities. That may suggest better days ahead for industrial commodities. A lot of that new demand, however, may also be predicated on a stronger Chinese stock market which is the world's biggest importer of those commodities.
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Chart 11
RISING BALTIC DRY INDEX SUPPORTS HIGHER BOND YIELDS... I'm ending today with the same chart I ended with on September 12 which compares the Baltic Dry Index with U.S. Treasury yields. The headline is also the same: "RISING BALTIC DRY INDEX SUPPORTS HIGHER BOND YIELDS". Chart 12 shows the two lines trending pretty much in the same direction since 2008. Both plunged together that year as the global economy collapsed. After rebounding together in 2009, both declined into 2012. The main point of Chart 12 is that both turned up together this spring and continue to rise together. That makes economic sense. Rising shipping rates reflect increased demand for natural resources, which is normal in a global economic recovery. A stronger global economy normally results in higher bond yields. Chart 12 also suggests that there's a lot more behind rising bond yields than Fed tapering. And, as I've said many times before, that's a good thing. That's especially true for companies that produce those natural resources.
