"The history of Eureka lies in its future." - Lambert Molinelli, 1878


The author/editor of the Eureka Miner owns common shares of local mining stocks, General Moly (GMO) and Newmont Mining (NEM); together with benchmark miner Freeport-McMoRan (FCX). Please do your own research, markets can turn on you faster than a feral cat.

Tuesday, July 6, 2010

The Death Cross & Armchairs - Freeport & Thompson Creek

Morning Miners!

It is 5:50AM. Have a hot cup of sure-feels-like-Monday coffee. I hope you had a good Fourth and the ole Colonel can't wait to show you his latest addition to the break room. Let's step into the shop for a minute - there she is...ain't she a 'beaut. "What the heck is that, you say?" Why this is our very own market forecaster armchair.

Over the weekend I got a good deal on a La-Z-Boy recliner up in Battle Mountain. Eric helped me outfit it with the rear view mirrors from his old Pete and John donated the windshield from one of his retired chevys. Now we can see where we're going and where we've been. Let's see if we can apply a little armchair wisdom to the metals & miners.

Looking in the rear view mirror we see a troubling sign. The journalist of business news programs were all in a stir Friday that the S&P 500 had crossed the dreaded "death cross" signaling that we were headed for even worse times in the broader markets. The so-called death cross is a technical condition when the 50-day price average crosses below the 200-day average; a bearish indicator that says near term performance is in decline with respect to a longer term trend. Before you run for the exits, let's try and understand what this really means. First of all, these averages are in "market days", roughly five days to a week less an occasional holiday. So, 50 days really represents 10 calendar weeks and 200-days, 40 calendar weeks putting us somewhere around last October.

The second part to grasp is the average itself. If you slow down form 60 mph to stop at a light, your average speed is 30 mph. Unless you ran the light, your present speed is zero; if it took you 30 seconds to stop, your 30 mph average speed occurred at one-half the averaging time or 15 seconds ago. By this logic, hitting the "death cross" Friday really tells us something about the markets five weeks ago (i.e. 50/2 = 25 market days or 5 weeks, see note 1). Market averages are a look in the rear view mirror, pardner.

Rear view mirrors are great for historians but the rest of us need to look out the windshield occasionally or we're going to going to crash. I believe a predictive measure like the Eureka Miner's Index (EMI - what's this?) should be used in combination with backward looking averages to achieve a balanced view of where we're headed in the marketplace.

How is the EMI predictive? First of all it uses present, not past data to provide a daily assessment of where we are. Secondly, bellwether miner Freeport-McMoran (FCX) and benchmark moly miner Thompson Creek (TC) used in the EMI have a solid track record of sensing upcoming trends in the metals & miners. Remember that Freeport and Thompson Creek rolled over in early April while copper prices and the broader markets were still rising. Copper topped out 4/12 (COMEX $3.6910, July contract) and the S&P 500 hit its high 4/26 followed by significant declines in both for a miserable May and June. Interestingly, Freeport and Thompson Creek hit their "death crosses" long before the S&P 500, on 2/24/2010 (FCX = $75.99) and 5/25/2010 (TC = $12.55) respectively.

Both FCX and TC are highly correlated with the FXI, an index that is designed to represent the performance of the mainland China equity market and is available to international investors. The tight relation is no surprise because their products (copper and molybdenum for FCX and molybdenum for TC) have seen significant demand growth in China in the recent past. Although often maligned for their volatility and government control, the Chinese stock markets have predicted declines in our domestic markets with regular accuracy. Here is a chart of the FXI (black) and the S&P 500 (orange) for the past year:

Notice how the FXI has anticipated the winter and spring declines in our own markets ending up only a few percent above its level one-year ago. The S&P 500 has fared better up some 13% but down considerably from its April high. What's next? There were some bullish talking heads Friday that claimed recovery from the "death cross" (i.e. 50-day average rises above the 200-day) was historically six months. I'm always skeptical of these ballpark numbers and did some checking of my own. I didn't have to dig back too far to dispute this claim:

Death Cross & Resurrection for the S&P 500

7/18/2006 to 9/6/2006 1.6 months
12/21/2007 to 6/19/2009 18 months
7/2/2010 to ????

Phooey on death crosses! Let's spend the rest of this short week looking out our armchair windshield and less time worrying about what's behind us. Looks like we're having a good day today with copper back over $3 with the steelmakers on a roll - Yee-ha!

Before we go let's check on our ever courageous Miss Moly and last week's EMI...

Molybdenum Weekly Summary

Molybdenum prices remain in a trading range with Western moly oxide price sitting above above European moly and LME futures seller contracts.

Western Moly Oxide (FeMo65) remains at $16.00/lb (the price reported by Infomine and tracked by Base Metals on the General Moly Website)

Moly Oxide, Europe (Mo Drummed Molydbic Oxide EU) moves down to 14.30/lb (the price reported in the Metals Bulletin)

LME Futures Contracts

LME cash seller is at $32,500/metric ton $14.74/lb

3-Month (Buyer) $31,000/metric ton $14.06/lb
3-Month (Seller) $33,000/metric ton $14.97/lb

15-Month (Buyer) $31,000/metric ton $14.06/lb
15-Month (Seller)$33,000/metric ton $14.97/lb

Here is a chart of the LME 3-month contract (seller) from the February launch to the present:

Last week's Eureka Miner's Index (a larger, more readable chart is near the bottom of this blog page):

Enough talk, let's walk the walk:

Our newly minted Eureka Miner's Index (EMI - what's this?) is sub-par at 84.75; but well up from Friday's 72.67 and the 6/7/10 low of 50.7. Remember an EMI greater than 100 is good times for metals & miners.

4-WD is ON - rough roads in the marketplace; The VIX or "fear index" is above 25; metals & miners remain on shaky timber with benchmark FCX trading in the the low-$60s well below its 200-day average of $76 (our new warning level), 10-year Treasurys are safely below 4% preserving a low-interest rate environment

The GREEN light is turned back on for Commodity Reflation with copper trading above $3/lb

The GREEN light is turned on for Stable Markets the VIX below the 30 level (what's this?)

The YELLOW light is turned back on for Investor Confidence as further market corrections are likely

The GREEN light remains turned on our Fuel Gauge with oil below $80

A ORANGE light is ON for possible adverse regulation/legislation: Mine Safety Violations, Miner's claim fee, Miner taxation, Cortez Hills, mercury emissions &
General Moly Mt. Hope Water Rights

Otherwise, all lights are green on the Eureka Outlook Dashboard (upper right, what's this?)

NYMEX/COMEX: Oil is up $0.94 in early trading to $73.08 (August contract, most active); Gold is down $5.0 to $1202.7 (August contract, most active); Silver is up $0.146 to $17.865 (July contract, most active); Copper is up $0.0940 to $3.0100 (September contract, most active)

Western Molybdenum Oxide is at $16.00; European Molybdenum Oxide is at $14.50; LME moly 3-month seller's contract is $14.97, LME cash seller is $14.74

The DOW is up 156.74 points to 9,843.22; the S&P 500 is up 18.01 to 1040.59. The miners are up except for the gold diggers:

Barrick (ABX) $43.06 down 0.42%
Newmont (NEM) $58.52 down 0.41%
US Gold (UXG) $4.60 down 0.65%
General Moly (Eureka Moly, LLC) (GMO) $3.15 up 2.94%
Thompson Creek (TC) $8.92 up 1.25%
Freeport-McMoRan (FCX) $61.30 up 4.71% (a bellwether mining stock spanning copper, gold & molybdenum)

The Steels are up, (a "tell" for General Moly & Thompson Creek):

ArcelorMittal (MT) $28.57 up 4.61% - global steel producer
POSCO (PKX) $100.25 up 5.82% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 1.65% to $1,321,392.13 (what's this?).


Colonel Possum

Write Colonel Possum at colonelpossum@gmail.com for answers to your questions or to request e-mail updates on the market

Note 1: In this example, the time delay of the averaged data is an approximation assuming a constant rate-of-change in the market or stock. In practice the frequency content (related to volatility) of the parameter being averaged affects the lag time.

Headline photograph by Mariana Titus

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