A Copper Buy Signal…

| May 13, 2011 | 0 Comments

The bears are at it again…

For the umpteenth time, bearish investors are claiming the two-year stock market rally has peaked.  This time they point to copper’s recent weakness.  They say it’s a sure sign stock market losses are just around the corner.

What are these perennial pessimists talking about?

Let’s take a look…

First of all, copper is often viewed as a leading indicator of economic growth (or weakness)… I’ll give em’ that.

Why?

Well, copper is an essential industrial metal.  A wide gamut of industries rely on copper for their products.  And that makes copper’s trading direction a solid leading indicator of economic activity.

Many investors see high demand and rising copper prices as a sign of strong economic growth.  It’s no wonder bullish copper activity is frequently used as a signal to buy stocks.

But the opposite is also true…

Falling copper prices are often seen as a sign economic growth is slowing.  As a result, some investors say falling copper prices are a signal to lighten up your investment portfolio.

That’s exactly what the bears are saying right now, and here’s their evidence…

Copper Chart

As you can see, copper was trading at all time highs not too long ago.  But in recent trading, the metal is down to the $3.95 a pound area.  The pullback is all the evidence the top callers need to push the sell button.

But I think it’s too early to call a market top…

There’s no question copper is falling in recent trading.  But to me it looks like a healthy, short-term correction.  I wouldn’t be dumping your stocks based on the above chart just yet.

After all, take a look at a longer term copper chart…

Copper Chart

Here you can see copper is testing its long-term uptrend line from the 2009 lows.  Right now the long-term uptrend in copper is still solidly intact.  I would consider lightening up your portfolio only if copper breaks below this important trendline.

But I don’t think it’s going to happen…

In fact, it’s much more likely we’re going to get a copper bounce in coming days.  In my eyes, copper is a great buying opportunity.

How can you invest for a copper bounce?

Look no further than Freeport-McMoRan (FCX).  The large cap copper miner is presenting a nice low risk buying opportunity.

Take a look…

FCX Chart

As you can see, FCX is breaking below $50.  Investors have been jumping ship in recent days as copper drops.  But also notice FCX is testing its 200-day moving average (green circle).

This is where you should be adding the miner to your portfolio.

Why?

Professionals watch the 200-day moving average closely.  When an uptrending stock tests it, many use it as a buying opportunity.  It’s a strong technical buying signal that I’ve used for years.

But the strong technical setup isn’t the only reason why I like FCX.  I’m also a big fan of the company’s solid fundamentals.

Here’s what I mean…

FCX recently reported first quarter earnings well above analyst estimates.  But despite the bullish results, the miner is trading at just 8x projected 2011 earnings.  That’s well below the industry average of 12x.

Clearly, FCX is a nice bargain at current levels.

The bottom line is this…

Copper prices are a good indicator of economic growth.  But bearish investors are jumping the gun by saying the recent fall in copper is a sell signal.  If we get a bounce in copper as I expect, FCX will be off to the races.

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Category: Stocks

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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