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Tech Talk’s Weekly Column in the Financial Post

The column was published yesterday after a two day delay from our regular schedule. Since writing the column last Thursday, several favourable events have occurred including a breakout by copper above resistance at $3.06 per lb. and breakouts above resistance by several key stocks in the sector. ETFs in the sector also have recorded exceptional gains.

Seasonality in the Base Metal Sector

The base metal sector has two periods of seasonality each year. According to Thackray’s 2010 Investor’s Guide, the sector has a short period of seasonal strength from November 19th to the end of the year. It also has a medium term period of seasonal strength from November 19th to May 5th. What is the outlook for the sector this year?

Seasonal influences
‘The base metal sector’s performance is tied to the performance of equity markets, but with greater risk/potential return. The seasonal trade has been profitable in 13 of the past 19 periods from November 19th to May 5th. Average return per period was 13.8% In contrast, the S&P 500 Index recorded an average gain of only 5.9% during these periods.

Favourable seasonal influences during these periods can be attributed partially to strength in base metal prices. Copper has advanced in nine of the past 10 periods from the end of October to the end of March for an average gain per period of 17.8%. Aluminum also has moved higher in eight of the past 10 periods from the end of September to the end of February.

Technical influences

Base metal prices such as aluminum and copper have improving intermediate technical profiles. They bottomed at the end of December last year and established intermediate uptrends. They currently trade above 200 day moving averages. Copper has traded between $2.64 and $3.07 U.S. per lb. during the past three months. A break above its range implies upside potential to $3.55 per lb.

The S&P/TSX Global Mining Index at 946 also has a positive intermediate technical profile. Intermediate trend is up. The Index trades above its 200 day moving average and recently bounced for the fifth time this year from its 50 day moving average. Resistance exists at 1,009.17. A break above resistance implies upside potential to 1,180. Short term momentum indicators (Moving Average Convergence Divergence, Relative Strength Index and Stochastics) currently are overbought.

Chart courtesy of StockCharts.com www.stockcharts.com

Fundamental influences

Fundamental prospects are mixed. World inventory levels of base metals currently are high and rising. Copper inventories declined significantly from January to July when the Chinese were accumulating an inventory position. However, their buying has been notable by its absence recently and world inventories have risen. Weakness in the U.S. Dollar has helped base metal prices in recent weeks. However, a key component for seasonal strength this year is an expected rise in demand triggered by a recovery from recessionary economic conditions in developed nations including Canada, the U.S. and Europe. The recovery will coincide with previously announced economic stimulation programs that will start to have a significant impact by next spring.

What to do

Proof of a recovery from recessionary conditions in developed nations is less than convincing to date. Preferred strategy is either to accumulate on weakness between now and January or to wait for an entry point near the end of January for a seasonal trade into May. Participating Exchange Traded Funds, that track the sector, include the Claymore S&P/TSX Global Metals and Mining Index ETF (Symbol: CMW), the BMO S&P/TSX Global Base Metals Hedged to Canadian Dollars Index (Symbol: ZMT) and the Horizon Beta Pro S&P/TSX Global Mining Bull+ ETF (Symbol: HMU). The Horizon Beta Pro ETF is a double leveraged ETF that is rebalanced daily.

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Don Vialoux has 37 years of experience in the Investment Industry. He is a past president of the Canadian Society of Technical Analysts (www.csta.org) and a former technical analyst at RBC Investments.  Now he is the author of a daily letter on equity markets available free on the internet. The reports can be accessed daily right here at www.dvtechtalk.com.

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Disclaimer:  Comments in Tech Talk reports are the opinion of Mr. Vialoux. They are based on technical, fundamental and/or seasonal data that is believed to be accurate. The comments are free. Mr. Vialoux receives no remuneration from any source for these services. Comments should not be considered as advice to buy or to sell a security. Investors, who respond to comments in Tech Talk, are financially responsible for their own transactions.

Disclaimer: Comments and opinions offered in this report at www.timingthemarket.ca are for information only. They should not be considered as advice to purchase or to sell mentioned securities. Data offered in this report is believed to be accurate, but is not guaranteed.