For some time, I've been
watching the global commodity trend closely for signs the game has ended.
Concerned with the prospect of economic slowdown in the US and/or China,
investors have shown occasional nervousness in 2005 after a multi-year
commodity rally only to find their moves to the exits to have been false
alarms thus far. The late summer commodity rally of 2005 has particularly
showcased precious metals, mining companies and coal. With commodities in
mind, today I review three commodity-related stock markets, Canada's Toronto
Stock Exchange Index (TSE), Australia's All Ordinaries Index (XAO-AU) and the
ETF proxy for the Sao Paulo Bovespa, the Brazil Fund (BZF) to try and
determine where things currently stand.
Toronto S& P TSE Index
(SPTSE)
The S&P TSE Index is a
capitalization-weighted index of the 60 largest and most liquid companies on
the Canadian Market.
The TSE is quite clearly in a
strong up-trend. From the August 2004 bottom at 452, the Canadian index's
upside move was refueled with a slight break in October. The TSE again paused
in the spring of 2005 around the time I first wrote about commodity stocks (Commodity
Stocks - Trouble or Opportunity 5-13-05), later rallying once more to its
recent 620 reading. So, what now? Is it wise to chase the Katrina
rebuilding/spending binge and its likely inflationary impact by way of
investing directly in Canada?
In addition to Point and
Figure charts, I look to a couple of indicators from the toolbox to help me
assess whether a pullback or further upside is likely.
Trading Bands. On the chart below, this index's
trading band is highlighted. This band represents the average price of a
holding over the last 40 trading days and its expected standard deviation
range from that average, a useful indicator to help judge whether an asset is
overbought or oversold in the short-term. It can be seen that this index
currently rests near the top of its own trading band.
Weekly Distribution. The is the numerical value indicator
telling how far above or below the medium point on the trading band a stock
lies. The TSE now resides 43% above that point and is thus overbought by 43%
on a weekly basis.
With these shorter-term
indicators in mind, one would be wise to exercise patience and try to wait
for pullbacks before making new purchases of stocks that would be
representative of companies in the TSE Index. I prefer to have a risk reward
ratio much more in my favor, and a pause in the latest advance back to the
550 range would tilt the odds back toward investors.
Australia (XAO-AU)
The All Ordinaries index
represents 500 companies listed on the Australian Stock Exchange and accounts
for approximately 99% of the total market capitalization of the Australian
market.
The Ordinaries participated in
the spring commodity sell-off (the tail end just barely visible on the bottom
left hand of the accompany chart) before seeing numerous upside breakouts
since. I certainly have been looking for signs of a trend reversal in many of
the commodity plays, only to watch them float ever higher. The Ordinaries
index has consistently traded on the higher side of its trading band, just as
strong stocks will tend to do. Still, as with the TSE I would prefer a
pullback to the low 4,000's to increase the risk reward opportunity before
making any heavy commitments to this market in the near-term.
Brazil Fund ETF (BZF)
The Brazil Fund is a close
proxy to the Sao Paulo Bovespa, which is how I will use it here. Among other
components, this ETF's major weightings include 32% in materials and a 12%
exposure to energy. Since many of the material and mining (in addition to
precious metals) stocks experienced strong rallies of late, this Brazilian
ETF is benefiting since one of its biggest components, for example, is
Companhia Vale do Rio Doce, a stock whose chart looks excellent.
Throughout the rebound in
global equities seen in the last couple of years, Latin American stock
markets have consistently shown up as some of the strongest on the radar
screen, and BZF has been right at the top. Indeed, from its $8.5 October 2002
low, BZF is up nine-fold, which poses a dilemma: although it currently is
below the very top of its trading band, it is 68% overbought... like the
markets highlighted above, it would seem wise to exercise patience before
entering stocks or funds on the Brazilian market. However, investors need to
keep in mind that the strongest s tocks and stock markets tend not to become
terribly oversold on retracements, that they tend to pull back only to the
middle of their trading bands, which is what investors might look for from
stocks on this exchange.
While I'm using this ETF as a
proxy for the Brazilian market for the purposes of this article, it must be
said that the Point and Figure bullish price objective on BZF is $67 which
implies that though a pause may be in order, the Brazilian market may have a
lot further to run on the upside.
Finally, investors would be
wise to keep in mind that the stock markets of "commodity
economies" have seen the biggest runs over the last couple of years,
another reason to exercise patience with regard to initiating new equity
positions in commodity-related markets. While interesting from a fundamental
standpoint and still healthy, if short-term overbought, on a technical basis,
the world's commodity-related stock markets must be monitored closely by
those participating in them.
