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[jlfmi]

Basic Resource Stocks Clear Another Major Hurdle

Basic resource stocks continue their strong rally, breaking a 9-year downtrend.

We have mentioned on many occasions the recent relative strength shown by stocks having anything to do with commodities, natural resources, basic materials, etc. This impressive strength is especially true of the past 12 months as the resource equity space, badly beaten down for roughly 8 years, has mounted a compelling attempt at a major reversal to the upside. And since the presidential election, in particular, these stocks have overcome some key potential hurdles in furthering their long-term turnaround story. A prime example can be seen with the Dow Jones U.S. Basic Resources Index.

In late November, we posted a chart laying out what we thought might be a formidable confluence of potential resistance for the index, including:

23.6% Fibonacci Retracement of 2008-2016 Decline ~168

38.2% Fibonacci Retracement of 2011-2016 Decline ~177

61.8% Fibonacci Retracement of 2014-2016 Decline ~163

The Post-2008 Down Trendline (on a log scale), connecting the 2011 High ~178

The DJ Basic Resources Index was trading at around 172 at the time, so right in the thick of the resistance cluster. Over the following week, the index would bounce as high as 179, squarely testing the post-2008 Down trendline. As it turns out, the trendline held and prices commenced a 2-month long consolidation, holding below the post-2008 trendline -- until now.

In the past few days, the index has broken out above the well-defined downtrend line, seemingly overcoming another hurdle in its long-term turnaround story.

Obviously, the break above the former resistance line has to be sustained in order for it to be meaningful. Furthermore, while prices have surmounted the down-sloping post-2008 trendline, they have not convincingly surpassed that lateral, early December high. So, as always this developing breakout needs to be monitored.

However, at this point, basic resources stocks appear to have cleared yet another key hurdle as they continue to demonstrate persistent relative strength -- and continue to pile up evidence in favor of a major cyclical upturn.

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Disclaimer: JLFMI’s actual investment decisions are based on our proprietary models. The conclusions based on the study in this letter may or may not be consistent with JLFMI’s actual investment posture at any given time. Additionally, the commentary provided here is for informational purposes only and should not be taken as a recommendation to invest in any specific securities or according to any specific methodologies. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

[jlfmi]

Rally In Basic Resource Stocks May Get Rocky

Basic resource stocks have been on a tear this year -- but they are testing major resistance right now.

It’s no secret that resource stocks have been among those benefiting the most during the post-election rally. Using the Dow Jones U.S. Basic Resources Index as a gauge, the space is up about 17% over the past 3 weeks. However, folks should remember that this isn’t just a “Trump Trade”. The fact is, from the January low to the close the day after the election, the Basic Resources Index exactly doubled. So this move has been in the works for most of the year. So what will stop it? Perhaps some good old chart resistance -- and a lot of it.

In what form is this chart resistance that we are detecting? On the DJ Basic Resources Index, it includes:

23.6% Fibonacci Retracement of 2008-2016 Decline ~168

38.2% Fibonacci Retracement of 2011-2016 Decline ~177

61.8% Fibonacci Retracement of 2014-2016 Decline ~163

The Post-2008 Down Trendline (on a log scale), connecting the 2011 High ~178

This confluence of potential resistance represents the stiffest challenge yet for the Basic Resources rally. Each of these potential lines of resistance is noteworthy by itself, let alone having them all clustered in the same vicinity. That fact should make this area particularly tough to penetrate.

As we’ve stated recently in several posts, the cluster of Fibonacci levels is particularly important to us. It not only creates multiple layers of potential resistance, but it serves as a sort of validation of the market junctures that we’ve identified.

So is this potential resistance going to impede the Resources rally? Given the recent boost in construction/industrials/materials, etc., we’ve noted a number of associated indices or funds encountering similar clusters of resistance. Some have been thwarted while some have broken through (for now). So, in our view, the jury is still out regarding the immediate resolution of resource resistance. Thus, while his area should serve to stonewall Basic Resources, at least temporarily, our mind is also open to a brick-busting breakout.

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More from Dana Lyons, JLFMI and My401kPro.

The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

[jlfmi]

Is Resource Reflation For Real?

A number of key charts pertaining to the basic resources sector have scored important breakouts in recent days. 

As large-cap averages break into all-time high ground, a key question on many investors’ minds is does this move have legs -- or will it prove to be a bull trap? One factor that would certainly help give the move “legs” would be the continuation of the bounce in commodity and resource based equities. After getting absolutely pummeled in the deflationary spiral over the past few years, resource stocks have enjoyed a resurgence since the January-February lows. Then again, so has the entire equity market. So, is this rally in basic resource stocks merely a mean-reversion bounce, in line with overall market beta? Or is it something more substantial -- a legitimate reflationary move. While we still can’t say with certainty either way, evidence continues to pile up that we are witnessing more than simply a dead cat bounce.

Why do we say that? Well, as you may know, as active risk managers, we don’t spend any time opining about why the market is doing what it is. All we are concerned about is what IS happening in the market. And in the resource sector, a number of positive developments are taking place. For one, one of the key and most comprehensive indices in the area, the Dow Jones U.S. Basic Resources Index, has just scored an important technical breakout.

Specifically, the index has just overtaken its Down trendline extending from the sector’s peak in 2008 and connecting the peaks in 2011, 2014 and several touches from April to June of this year.

One other interesting facet of the chart of the Dow Jones U.S. Basic Resources Index catches our eye. During the January selloff, the index broke below its low from 2008. However, it was able to recover that level in short order and continue to move higher. This type of “false breakdown” can be as powerful in jump-starting a move to the upside as a breakdown can be to the downside.

We pointed out a similar false breakdown in the gold miner stocks back in January that served as a springboard to an epic rally since. It should thus be no surprise that the Dow Jones U.S. Basic Resources Index has a large number of mining stocks, and specifically, gold mining stocks, in it. And if the index is to follow the lead of the gold miner indices, there could be plenty more upside to go.

Since the Dow Jones U.S. Basic Resources Index is perhaps off the radar for most, we will show one more chart that may be more familiar and at least more accessible for investors. The SPDR S&P Metals & Mining ETF (ticker, XME), is one of the most popular mining/resource funds in the market. Its chart is also showing similar characteristics as the Dow Jones U.S. Basic Resources Index.

Note how XME has recently broken above its post-2011 Down trendline. This is an important development regarding the prospects for more upside in the ETF. Additionally, note also how XME suffered a similar false breakdown early this year. The bounce off the low has already seen the ETF more than double in price. Given the damage seen in the fund over the past 8 years, this bounce could just be the beginning of a larger bull market.

The same goes for the Dow Jones U.S. Basic Resources Index and the entire sector. After the deflationary spiral since 2008, this year’s rally could be nothing more than a mere mean reversion bounce. The potential upside to a legitimate, cyclical bull market would be many multiples of the bounce we’ve seen. Whether that type of a move is in the works or not, we cannot know for sure. We just need to gauge it one step at a time.

But the steps made by the sector this week have been important ones in broadening the possibility of such a cyclical bull market.

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More from Dana Lyons, JLFMI and My401kPro.

The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.