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The Next And Newest Risk - Global Growth

Before getting to the main thrust of my article let me state several facts regarding my current trading positions in the market. First, equities remain in a bear market and are likely to do so for another 12 months. Two, I am positioned long and have been so for 4 weeks now for a contratrend rally. My long side bias is due to three factors: 1) the retail investor is bearish and this is a bull signal; 2) the smart money (see previous article) is bullish and this is a bull signal; 3) inflation pressures are moderating significantly. Now to my article which was written on August 3, 2008.

For months now the hopes of investors have been kept alive by the notion that global growth will bail out the US economy. We are told that global growth has decoupled from the US economy. But I think this theory of decoupling - where the US economy and world economy function independent of each other - will be debunked.

We know the US economy is in a recession or on the brink of one as the GDP numbers and employment data showed this past week. Furthermore, US equities have been in a bear market for 8 months now. We know the US economy has many obstacles to overcome including but not limited to: 1) the housing crisis; 2) the credit crisis; 3) consumer retrenchment; 4) lack of a coherent energy policy; and 5) inflationary pressures. All this is known and unlikely to be worked out anytime soon. But what isn't widely accepted is that the global growth story is failing as well, and I believe this is the next and newest risk for US equities.

Why do I think that the global growth story is over?


First up is copper. Copper is our proxy for the global economy, and I have been showing this same monthly chart for over 6 months now. I am not ready to call a bear market for copper as prices are only at support, but a monthly close below 3.55 would be very bearish as it would be a close below prior support, below a negative divergence bar, below the 10 month moving average, and below a rising trendline. The global growth story is likely to end with a big thud. Enough said.

End result: copper is hanging in there, but just barely.

Figure 1. Copper/ monthly

On the other hand, the world's largest copper producer has just entered bear territory. Figure 2 is a monthly chart of Freeport McMoran (NYSE: FCX). Last month's close was below a rising trend line and 10 month moving average, and this confirms the double top. I believe it is only a matter of time before FCX closes below the prior pivot low point (oval on chart) and starts a down trend.

Figure 2. FCX/ monthly


Moving from copper to other metals, figure 3 is a monthly chart of the Dow Jones US Basic Metals (NYSE: IYM). This is also bearish as last month's close was below both the rising yellow trend line and the 10 month moving average. The upside for this ETF has been capped at $84, which is the high of the negative divergence, but the real risk is a potential sell off to prior breakout levels around $60. Metals were one of the few things working in this market, but I would be very cautious on this sector (not withstanding the occasional 10% bounce). Remember, nothing is safe in a bear market.

Figure 3. IYM/ monthly

Crude oil's 15% fall from its highs is as much about "nothing ever grows to sky" as it is about slackening global demand. See figure 4, a monthly chart of crude oil. From a technical perspective, crude oil's extreme expansion in price range and negative divergence bar suggested that prices would move in a range for at least the next four months and likely longer. Upside momentum has slowed. While that is the technical side of the story, I believe the fundamentals will eventually reveal decreasing demand for crude oil as there is greater acceptance that the global growth story is now defunct.

Figure 4. Crude Oil/ monthly

It should be noted that ExxonMobil (NYSE: XOM) reported record profits this past week, yet the stock fell 3% after the announcement. I had warned about XOM several weeks ago, and last month's close below a prior pivot low is bearish. Period. See figure 5, a monthly chart of XOM.

Figure 5. XOM/ monthly


Another bearish chart, which is also representative of the global growth story, is seen in figure 6, a monthly chart of the i-Shares MSCI Brazil Index Fund (NYSE: EWZ). The break below the support zone and below the rising trend line and the 10 month moving average are all bearish signs. The prior support zone now becomes resistance. High flying Brazil is having its wings clipped.

Figure 6. EWZ/ monthly

I had mentioned the i-Shares MSCI Emerging Market Index Fund (NYSE: EEM) in a July 14 commentary. See figure 7 a monthly chart. Several weeks ago I stated: There are "a lot of bearish elements to this chart including: 1) a close below a prior divergence bar (pink marker); and 2) a close below an upsloping trend line. A close below the most pivot low would seal the deal, and EEM would be in a bear market." Well that has happened and by my analysis, EEM is in a bear market.

Figure 7. EEM/ monthly

To learn more about our quantitative strategies and our dicsiplined approach, please visit us at www.thetechnicaltake.com.


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