How commodity price action can help investors cut through the...

How commodity price action can help investors cut through the noise

Many investors are surprised that key resource stocks BHP and Rio Tinto are trading at or near their highest share prices since the global financial crisis (GFC).
Both individual and institutional investors are generally underweight in these stocks. The prevailing market narrative has Europe on the verge of recession, China cooling, and the US economy about to tank as last year's fiscal sugar hit wears off.In such a bearish scenario, how can global mining stocks hit decade highs?The upswing in copper and iron ore prices signals it's not too late to buy resource stocks and that demand is stronger than the market narrative suggests. The problem is the narrative, not the major miners. This is particularly challenging for investors. Markets price the future and no matter how intelligent or hard-working, no one knows the future. This means forecasters can be wrong year in and year out, sometimes without ever being called to account.
Much of the appetite for market bad news springs from our own biases and prejudices. Impending disaster for markets that speaks to our patriotism, our jealousy of others' success or merely our taste for juicy gossip catches eyeballs and clicks. Media organisations naturally favour stories that appeal to their readers, and the reality is that bad news sells.
Higher-quality media groups consciously seeking balance and sourcing their content from a wider variety of contributors, but the torrent of information can sometimes drown out these more rational voices.Further, there are commentators that also deliberately favour disaster. The reasons relate to recent market history. The very few forecasters that correctly predicted the market crash of 2007-2009 were lionised; they are considered heroes by some. On the other hand those taking a positive view are often dismissed as shills with a vested interest. It's apparently occurred to more than one bright young thing that calling the next market crash is a potentially career-making move.
Copper signals In an age of distrust it can be difficult to find the facts. But there is one source of opinion that is not only broad-based, but assuredly sincere. Market prices represent a consensus that is backed by people putting money on the line. They combine the "wisdom of crowds" with higher incentives for being right.Global copper markets are giving a strong signal right now.
Copper is a key industrial input. It's used in everything from construction to computers. For this reason some professional traders use the copper price as a barometer of global industrial sentiment.The weekly chart of the copper price over the last four years shows it breaking through a resistance level at US$2.84 a pound. This break is significant as since last May $2.84 snuffed out all previous copper price rises. In addition, the break comes after the completion of a "W" pattern, a special form of a double-bottom pattern. This combination of factors is pointing to further significant gains for copper prices.
But it's not just copper. Iron ore prices were boosted by the tragedy at competitor Vale's Brazilian mine, but were already well off lows. Oil prices appear to have bottomed, and last week echoed copper's moves higher.What does this mean for investors? For starters, it suggests it's not too late to buy resource stocks. There is no certainty in predicting the future, but the co-ordinated upswing in these key industrial commodities suggests the demand picture is stronger than the market narrative indicates. Resource stocks may continue to climb a wall of worry.
More importantly these price moves have broader implications. The Australia 200 index has climbed through the 6,100 level despite widespread scepticism. The better-than-expected demand scenario could be an important market driver, and may mean a test of the post-GFC high at 6,373 is more likely than a drop below 6,000. Investors who are underweight resources, or the share market generally, should consider themselves warned.

Michael McCarthy is chief market strategist at CMC Markets.