The period of seasonal strength in the metals and mining sector is approaching. What are prospects this year?
Thackray’s 2012 Investor’s Guide notes that the metals and mining sector has two periods of seasonal strength: From November 19th to January 5th and from January 23rd to May 5th. The combined periods have recorded an average return per period during the past 22 periods of 16.1%. The trade has been profitable in 17 of the past 22 periods. Subsectors in the metals and mining sector include steel, base metals, precious metals and coal. All subsectors are impacted by incremental demand during their periods of seasonal strength.
Last week was a difficult week for world equity markets. Equity indices in developed nations declined by 1% in Toronto and as much as 7% in Paris and Athens. The major exception was the Shanghai composite index, up 2.2%. The charts are telling us that China’s economy has turned the corner. During the past year, the Chinese government has taken steps to dampen inflationary expectations by raising interest rates and by limiting credit availability. The Shanghai composite subsequently fell 27% from its high at the beginning of November last year to its low two weeks ago.
Dampening efforts have succeeded. Inflation rates have peaked and GDP growth has stabilized at a lower, but health level near 9%. The Chinese government is encouraging growth through domestic spending instead of growth through exports to the western world.
A more favourable economic outlook for China has a direct impact on the metals and mining sector. Incremental demand for copper, zinc, lead, coal, nickel, silver, fertilizer, platinum, steel, etc. during the following year is expected to come mainly from China. On the charts, the S&P Metals and mining Index ETF (XME $56.93) has an improving technical profile. It bottomed at US$40.17 with most world equity indices on October 4th.
Strength relative to the S&P 500 Index and the TSX Composite Index has been positive during the past month. Units recently moved above their 50-day moving average. A break above resistance at $59.38 completes a bullish reverse head and shoulders pattern. Short term momentum indicators are overbought. The preferred strategy is to accumulate on weakness closer to their 50-day moving average currently at $52.21 as the period of seasonal strength approaches.
Other possible investments in the sector and its subsectors include individual stocks in the sector as well as a wide variety of Exchange Traded Funds including Market Vectors Steel ETF (SLX US$54.40, Market Vectors Coal ETF (KOL US$), PowerShares DB Base Metals Fund (DBB US$19.73), iPath Exchange Traded Notes Dow Jones-AIG Copper Total Return Series A ETN (JJC US$46.17), Claymore S&P/TSX Global Mining ETF (CMW $21.82), BMO S&P/TSX Equal Weight Global Base Metal (hedged) ETF (ZMT $17.14) and Horizons Betapro Comex Copper Bull+ ETF (HKU $10.97)
Don and Jon Vialoux are the authors of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. They also are research analysts for Horizons Investment Management Inc. All of the views expressed herein are their personal views although they may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment. Horizons Investment is the investment manager for the Horizons family of ETFs. Daily reports are available at http://www.timingthemarket.ca/ and http://www.equityclock.com