COPPER AND STEEL STOCKS RESUME UPTRENDS -- CRUDE OIL BOUNCE BOOSTS ENERGY SECTOR -- OIL SERVICE STOCKS ARE ENERGY LEADERS -- CANADIAN STOCKS HIT NEW RECORD ON COMMODITY RALLY -- AUSSIE AND CANADIAN DOLLARS ALSO TURN UP
COPPER AND STEEL STOCKS RESUME UPTRENDS... Economically-sensitive industrial metals are rising again, along with stocks tied to them. The price of copper is up 3.5% today to the highest level in nearly two years. So are copper shares. Chart 1 shows the Global X Copper Miners ETF (COPX) resuming its uptrend. The COPX is now trading at the highest level since the second half of 2014. The price of iron ore (which is used in the making of steel) is also surging in China to the highest level in two years. So are stocks tied to both commodities. Chart 2 shows the VanEck Vectors Steel ETF (SLX) trading at a new two-year high. This week's steel leaders include Cliffs Natural Resources (CLF), US Steel (X), and Nucor (NUE). Mining stock tied to iron ore like BHP Billiton (BHP, Rio Tinto (RIO), and Vale are also seeing big gains. Growing imports to China for construction purposes are a big driver behind rising copper, iron ore, and steel demand.
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Chart 1
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Chart 2
CRUDE OIL NEARS UPSIDE BREAKOUT ... The price of WTIC Light Crude Oil is up nearly $1.00 today and nearing $54 a barrel. As Chart 4 shows, that puts WTIC less than a dollar from a new 52-week high. Crude oil is another economically-sensitive commodity that is benefiting from signs of global growth (with higher inflation). Energy stocks, which have been lagging behind lately, are helping lead this week's stock rally. Chart 4 shows the Energy Sector SPDR (XLE) bouncing off chart support along its October high, and not far from its 200-day average (red arrow). In addition, its 9-day RSI line (top of chart) is stabilizing near oversold territory at 30. That's helping support the rest of the market. That, however, is not where energy leadership lies. Oil service stocks have a stronger chart pattern, and display better relative strength.
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Chart 3
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Chart 4
OIL SERVICES ETF LOOKS STRONGER... Chart 5 shows the VanEck Vectors Oil Services ETF (OIH) suffering a milder pullback in the new year than the XLE. The chart also shows the OIH rising above a "neckline" during November to complete a "head and shoulders" bottoming pattern. What's also striking is the sharp rise in the OIH/XLE ratio (top of chart), especially since November. Since the election, the OIH has gained 20% versus a 7% gain in the XLE. That would appear to make the OIH a stronger choice for those looking to invest in the energy patch. The bullish chart pattern for the OIH is also a vote for higher oil prices.
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Chart 5
TORONTO STOCK INDEX REACHES NEW RECORD... With commodity prices on the rise again, it's not surprising to see Canadian stocks doing the same. The weekly bars in Chart 6 show the Toronto Composite Index ($TSX) moving above its 2014 high to reach a new record. The green bars show Canada iShares (EWC) touching a nearly two year high. Material stocks tied to commodities have led the TSX higher over the last month. Energy stocks are helping lead it higher today. The EWC lagged behind the TSX for most of 2016 because of weaker Canadian Dollar. But that may be changing as commodity currencies start to strengthen.
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Chart 6
AUSSIE AND CANADIAN DOLLARS REBOUND... Commodity currencies in developed and emerging markets are rallying along with commodity prices. The Brazilian real and Russian ruble are leading EM currencies higher. In the developed world, the Australian and Canadian dollars are turning up. The green line in Chart 8 shows the Aussie Dollar rising sharply to a three-month high. The red bars show the Canadian Dollar rallying as well in the new year. That's giving a boost to their respective stock ETFs which do better when their local currencies are rising. Both stock ETFs are trading at two-year highs today and are among the day's top foreign performers. Australia is benefiting from strong commodity exports (like iron ore) to China.
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Chart 7
CHINA ISHARES NEAR UPSIDE BREAKOUT... Emerging market commodity exporters Brazil and Russia have helped pull Emerging Markets iShares (EEM) higher over the past year. Since commodity prices bottomed last January, Brazil and Russian stock ETFs have gained 88% and 50% respectively (aided by their stronger currencies). That certainly reflects optimism on the direction of commodity prices. The world's biggest importer of commodities, however, has yet to turn up. But it's getting close. Chart 8 shows China iShares (FXI) in the final stages of an apparent "head and shoulders" bottoming formation. A move above the flat "neckline" drawn over late 2015/2016 highs (which appears likely) would complete that bullish pattern. Higher Chinese stock prices would hint at a stronger economy. And a stronger Chinese economy is usually a bullish sign for commodities prices (along with stock sectors, currencies, and stock markets tied to them). That's especially true of emerging markets which are closely tied to commodity prices.
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Chart 8
EMERGING MARKETS ISHARES BREAK OUT -- COMMODITIES MAY BE NEXT ... The red line in Chart 9 shows Emerging Markets iShares (EEM) exceeding last year's high to reach the highest level since mid-2015. That's obviously a good sign for that asset class and global stocks in general. For one thing, it shows a willingness to assume more risk. It's also a vote of confidence in rising commodity markets. Emerging markets did better than foreign developed markets last year by the widest margin since 2011 when commodities peaked. Chart 9 shows the EEM and the Bloomberg Commodity Index ($BCOM) (brown line) bottoming together last January and rising together over the last year. After pausing during the second half of last year, both started rallying together after the November election. The EEM has already broken out to the upside. That increases the odds that the commodity price index will do the same. Historically, there's a strong correlation between the two.
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Chart 9
STOCK/BOND RATIO NEARS NEW HIGH... There's a good and bad side to rising commodity prices. It's usually good for stocks, since it implies a stronger global economy. But it's bad for bond prices which are hurt by rising inflation. Rising commodity prices usually translate into higher global bond yields and lower bond prices. In that environment, stocks are a better choice than bonds. Chart 10 plots a ratio of the S&P 500 SPDR (SPY) divided by the 7-10 Year Treasury Bond ETF (IEF). The stock/bond ratio surged after the November 8 election as stocks rose and bond prices fell. The ratio has moved sideways since mid-December. But it looks like it's getting ready to resume its uptrend. A lot of that is tied to U.S. stock indexes hitting new records this week. But it also suggests that the recent rebound in bond prices has probably run its course.
