($COPPER) Archives - Page 3 of 4 - Mad Hedge Fund Trader

Emerging Markets Are Back!

Boy, did we have a great run in emerging markets during the 2000s!

A global commodity boom caused many of these markets to rise tenfold or more.

Go back to the earliest newsletters published by the Diary of a Mad Hedge Fund Trader in 2008, and you will find them chock full of recommendations to buy hard assets, emerging market ETFs, debt, and currencies.

As former colonies, many of these countries still base their economies on production of the precious and base metals, energy, and foodstuffs they once supplied the motherland.

And as a former correspondent for The Economist magazine covering this territory, I knew them well.

Then in 2011, the party abruptly ended, and a vicious five-year bear market ensued.

Oil peaked first, eventually nosediving some 82.5%, from $149 to $26.

Remember Dr. Copper, the only commodity with a PhD in economics? He gave up 57.9%.

And gold, that ultimate store of value for Armageddonists and conspiracy theorists everywhere? It plunged by 48.2%.

There are still a lot of unhappy American gold eagles sitting in bank deposit boxes around the country gathering dust, thanks to those ridiculous theories.

It didn?t help that a raging bull market in developed market government bonds sucked even more money out of these beleaguered countries.

The Emerging market debt ETF (ELD), collapsed by 32%. The emerging market currency ETF (CEW) dropped by 35.5%.

My long-term subscribers can already see where this is going.

The wonderful thing about all of these cross asset class declines is that they have a leveraged effect on each other.

So while the ishares MSCI Emerging Market ETF (EEM) fell by 38.9%, in dollar terms it declined by more than half.

Then a funny thing happened during the second week of January 2016.

Gold took off like a rocket.

It was closely followed by silver, oil copper, palladium, platinum, and iron ore. Only the ags failed to participate.

The bull market was back!

Portfolio managers were given a simple choice.

Should they chase developed market assets trading at all time highs with yields approaching zero. Or should they load up on emerging assets at decade lows with yields approaching 12%?

Yields that high can cover up a lot of mistakes and preserve principal.

If you voted for the latter, you deserve a brass ring.

Here we are some eight months later, and the emerging bull market is alive and well. In fact, it is about to take another substantial new leg upwards.

My money is on emerging market handily beating the major US stock indexes for the rest of 2016.

The reasons for this are many and complex.

For a start, the iShares MSCI Emerging Market ETF (EEM) is still cheap.

It has to rise by 21.6% just to get back up to its 2011 highs. As a laggard play, it is beyond reproach.

In emerging market debt, the positive carry is enormous.

The Wisdom Tree Emerging Market Local Debt Fund (ELD) is yielding 5.46%, some 390 basis points high than the ten year Treasury bond (TLT).

And if you want to go with individual rifle shots in single countries, you can earn as much as 11.90% in Brazil.

The ?lower for longer? philosophy of the Fed just shines a giant great spotlight on this paper.

And guess what happened while you weren?t looking?

Emerging market debt has ?emerged.?

Five years of balance sheet repair means their credit quality has improved.

Local credit markets have grown up too.

Once dominated by huge inflows and outflows from foreign investors, markets are now much more in balance, thanks to the rise of? local institutional investors and pension funds.

The fundamentals of these countries have been steadily improving.

Falling currencies gave them a competitive advantage that allowed? trade surpluses to dramatically improve.

Political stability is improving. During my journalist days, you used to be able to count on one good coup d??tat or revolution in the area a year. No more.

Many business friendly, pro trade governments have come into power, such as in Argentina, India and Peru.

Emerging market GDP growth rates are still double those found in developed markets.

Markets themselves are improving. Spreads for stocks and bonds are now much tighter in emerging markets and liquidity has improved. They are ?roach motel? markets no more, where you can check in, but you can?t check out.

Get this one right, and the cross asset class hockey stick effect we saw on the downside will work just as well on the upside.

In short, there is a lot more to the emerging market dollar than there used to be. It is just a matter of time before financial markets figure this out.

Looking for the Next Bull Market

Don?t Be Short China Here

Diary, Newsletter

Everyone who has been reading this letter for the past eight years (yes, there are quite a few of you), know that I am a fundamentalist first and a technician second.

Of course you need to use both, as those who mistakenly leave one tool in the bag reliably underperform indexes.

The one liner here is that I use fundamentals to identify broad, long term, even epochal trends, and technicals for the short-term timing of my Trade Alerts.

Do both well, and you will prosper mightily.

Strategists often like to cloak themselves in the fundamental or technical mantle. But parse their words carefully, and the best fundamentalists talk about support and resistance levels, while the ace technicians refer to the latest economic data points.

The reality is that the best of the best are using both all the time. The differential titles have more to do with marketing purposes than anything else.

Having said all that, you better take a good, hard look at the chart below for the Shanghai Stock Exchange Composite Index ($SSEC). This is a classic narrowing triangle spread over the entire five years of the Chinese bear market that is imminently going to explode one way or the other.

My bet is that it resolves to the upside. All it would be doing then is coming in line with the rest of the global equity markets, including those of many emerging markets.

Since the top, the earnings multiple of Chinese companies have plunged, from 35 times to a mere 15 times. This means that the 6% a year growing economy (China) is trading at a lower multiple than the 2% a year growing one (the US). The big question among strategists since 2009 has been how far these valuations would diverge.

If I am right, then you can expect a rally of at least 25% in the Shanghai market soon, and more in peripheral markets, like Hong Kong (EWH) and in single Chinese names.

The rally will also place a laser like focus on the Chinese Internet sector, so you won?t go wrong picking up some Baidu (BIDU) around $180, if you can get it.? I originally recommended buying the stock at $12 seven years ago.

If you are looking for further confirmation of the coming bull move in China across asset classes, please peruse the chart below for copper. The red metal has one of the closest correlations out there with the fate of the Middle Kingdom?s economy and stock markets. It appears to be breaking out of a major three-year downtrend as well.

The other nice thing about this scenario is that it provides more fodder for my expectation of another global bull market move in the fall, when you can expect major indexes to tack on another 5% by yearend.

Jim Chanos, watch your back!

Here is Your Big New Year Trade

Diary, Newsletter, Research

When Dr. Copper (CU), the only commodity with a PhD in economics, suddenly collapses from a heart attack, risk takers everywhere have to sit up and take notice.

Since the 2011 top, the red metal has collapsed a shocking 40%. It has given back a nausea inducing 10% just in the last two weeks. Will copper take down the rest of the financial markets with it?

Is the bull case for risk assets over?

I doubt it.

So called because of its uncanny ability to predict the future of the global economy, copper is warning of dire things to come. The price drop suggests that the great Chinese economic miracle is coming to an end, or is at least facing a substantial slowdown, the government?s 7.5% GDP target for 2014 notwithstanding.

It?s a little more complicated than that. Copper is no longer the metal it once was. Because of the lack of a consumer banking system in the Middle Kingdom, individuals are now hoarding 100 pound copper bars and posting them as collateral for loans from banks or backstreet money lenders.

China is, in effect, on a copper standard. Get any weakness of the kind we have seen this year, and lenders panic, dumping their collateral for cash, crushing spot prices.

The latest plunge has been fueled by continuing rumors of an imminent Chinese banking crisis. The Middle Kingdom?s first corporate bond default in history, by a third tier solar company a few years ago, further heightened fears. The implicit government guarantee that was believed to back this paper suddenly went missing in action.

The high frequency traders are now in the copper futures and spot markets in force, whipping around prices and creating unprecedented volatility. Notice how they seem to be running the movie on fast forward everywhere these days? Because of this, we could now be seeing an overshoot on the downside in copper.

Copper, along with all other hard assets, have also been taking a pasting from the strong US dollar. A robust greenback has effectively raised the price of copper in non dollar currencies in big consuming countries, like Japan and Europe. The only way to adjust for this is for the traders to take down dollar prices, which the markets have been doing with a vengeance.

It is no coincidence that copper has been falling in almost perfect lockstep with the rest of the hard asset universe, including gold, silver, oil, natural gas, coal, all the ags and ag stocks, and the commodity producing currencies of the Australian (FXA) and Canadian (FXC) dollars. The world wants paper assets (stocks and bonds), and none of the stuff you can drop on your foot (thanks Dennis).

However, cheaper copper is ultimately great news for we copper consumers, as with everything else.

Watch Dr. Copper closely. At the first sign of any real bottom, you should load up on long dated calls for Freeport McMoRan (FCX), the world?s largest producer, which also has been similarly decimated. The leverage in the company is such that a 10% rise in the price of copper triggers a rapid 20% rise or more in (FCX) shares.

I can wax one here about major structural changes in the Chinese economy that are underway, as the real problem. As the Middle Kingdom shifts from an export driven economy to a domestic demand one, there is less need for the red metal and more need for silicon and brains. But this isn?t something you can trade off of today.

So what is copper really telling us? The longer-term charts show a prolonged bottoming process. If $2.90 fails, we could see a revisit to the five-year low at $2.50.

That?s your load the boat price. During the global synchronized economic recovery that is underway, you want to view every panic sell off in a single asset class like this as a gift.

There is one further hope for copper. The Shanghai stock market has been absolutely on fire this year, rocketing some 40% since June, even beating the heady US exchanges. When risk accumulation accelerates to this extent in the world?s largest copper consumer that is great news for copper.

The two asset classes are now wildly out of sync. Either Chinese stocks are ridiculously overpriced and soon have to crash to come back in line with the red metal. Or copper has to rise.

I vote for the latter. It could be your big New Year trade.

Charts to Watch For an End to the Crisis

Newsletter

Bad China data?.Russia threatens the Ukraine?.more bad China data?.maneuvers at the Russia-Crimea border. The bull has been punched out with a market that was down every day last week, China and Russia both taking turns thrashing investors, like tag team wrestlers. When will it end?

The canaries in the coal mine will be found in the charts below. This is where you will first hear the all-clear signal, when it is safe to return with an aggressive ?RISK ON? posture.

As always, watch the bond market. If the current rally in the (TLT) fails anywhere short of $110, it?s a sign that traders are fleeing the safety of the Treasury bond market and are happy to return to riskier assets, like equities. That equates to a ten year Treasury bond yield of just over 2.50%. A breakout of prices above this, and yields below suggest that more trouble is coming.

Keep close tabs on the Chinese Yuan (CYB). After an unrelenting five-year appreciation, it started a swan dive two weeks ago. That is when a banking crises in the Middle Kingdom started picking up steam. This prompted currency traders to unload Chinese renminbi for more stable dollars. The collapse of copper mirrors this. New signs of life in the Yuan and copper will hint that trouble there is over for now.

The Japanese yen is another big one to monitor. Most hedge funds borrow yen and sell them to finance long positions around the world. This is why the yen has been perennially week for the past two years. But when they dump these positions and hide under their beds, the reverse happens.

They buy back their yen shorts, pushing it up. That?s why the latest round of jitters has the Japanese currency probing four-month highs. If the yen fails here, it?s because investors are going back into the market for other assets.

Of course, the Russian stock market (RSX) is a no brainer to watch. Thanks to the antics of Vladimir Putin, it is down 28% so far in 2014, making it the world?s worst performing market this year. Invading your neighbors and threatening to incite WWIII is not good for your equities. I doubt he cares, but emerging market investors do.

Gold (GLD) is certainly earning its pay as a flight to safety instrument. It has been flying like a bat out of hell all year and is now testing major resistance. If the barbarous relic suddenly loses its luster, the memo will go out to buy paper assets once more.

Finally, keep the chart for the Volatility Index (VIX) planted on the top of your screen. Recent tops have been around the $21 level, only $3 higher than the current level. When cooler heads prevail, the (VIX) will collapse once again. Puts on the (VXX) are the way to play this move.

The interesting thing about these charts is that they are all moving to the extreme edges of multi month ranges. So we could be one more flush away from the end of this move.

That?s unless Russia really does invade Crimea in force. Then all bets are off.

This a Sell Signal

Why Copper is Crashing

Newsletter

When Dr. Copper (CU), the only commodity with a PhD in economics, suddenly collapses from a heart attack, risk takers everywhere have to sit up and take notice.

Since the 2011 top, the red metal has collapsed a shocking 38%. It has given back 10% just in the last two weeks. Will copper take down the rest of the financial markets with it?

I don?t think so.

So called because of its uncanny ability to predict the future of the global economy, copper is warning of dire things to come. The price drop suggests that the great Chinese economic miracle is coming to an end, or is at least facing a substantial slowdown, the government?s 7.5% GDP target for 2014 notwithstanding.

This gloomy view is further confirmed by the weakness in the Shanghai index ($SSEC), which has been trading like grim death all year. Will China permabear, Jim Chanos, finally get his dream come true?

It?s a little more complicated than that. Copper is no longer the metal it once was. Because of the lack of a consumer banking system in the Middle Kingdom, individuals are now hoarding 100 pound copper bars and posting them as collateral for loans.

China is, in effect, on a copper standard. Get any weakness of the kind we have seen this year, and lenders panic, dumping their collateral for cash, crushing spot prices.

The latest plunge has been fueled by rumors of an imminent Chinese banking crisis. The Middle Kingdom?s first corporate bond default in history, by a third tier solar company, further heightened fears. The implicit government guarantee that was believed to back this paper has suddenly gone missing in action.

The high frequency traders are now in the copper futures and spot markets in force, whipping around prices and creating unprecedented volatility. Notice how they seem to be running the movie on fast forward everywhere these days? Because of this, we could now be seeing an overshoot on the downside in copper.

The bottom line here is that copper is suffering from its own unique set of difficulties, which will have a negligible affect on other asset classes.

Watch Dr. Copper closely. At the first sign of any real bottom, you should load up on long dated calls for Freeport McMoRan (FCX), the world?s largest producer, which also has been similarly decimated. The gearing in the company is such that a 10% rise in the price of copper triggers a rapid 20% rise or more in (FCX).

I can wax one here about major structural changes in the Chinese economy that are underway, as the real problem. As the Middle Kingdom shifts from an export driven economy to a domestic demand one, there is less need for the red metal and more need for silicon and brains. But this isn?t something you can trade off of today.

So what is copper really to us? The longer-term charts show a prolonged bottoming process. If $2.90 fails, we could see a revisit to the five-year low at $2.50. That?s your load the boat price. During the global synchronized economic recovery that is underway, you want to view every panic sell off in a single asset class like this as a gift.

Now On Sale

Taking Profits on Freeport McMoRan (FCX)

Diary, Newsletter

This has been a real peach of a trade. In just eight days, (FCX) shares have jumped by 8%, taking the Freeport McMoRan October $28-$30 bull call spread from $1.68 to $1.93, a gain of 15%. And we did this by only risking 10% of our capital.

We managed to achieve this profit when the price of copper actually went against us, falling some 3%. Clearly the equity aspect of this position proved more important than the underlying fundamentals.

This is why I endeavor to find trades with multiple reasons to work. Hey, if you can?t skin a cat one way, try another. The dollars are just as good at the bar.

We have harvested 78% of the potential profit on this position, and have a full month to go to capture the rest. On top of that, we have a major market-moving event in two hours. So I am going to keep the gift and take the money and run. The risk/reward ratio has now swung against us. Also, I prefer to have some extra dry powder in case Ben Bernanke shocks us today, whatever the shock may be.

I wish they were all this easy.

Picking Up Freeport McMoRan

Newsletter

It is clear from the improving economic data from China that the hard landing scenario is off the table. This is great news for the producers of everything that the Middle Kingdom buys in bulk, especially copper.

If you like copper, you?ve got to love Freeport McMoRan, one of the world?s largest producers for the red metal. On top of these rapidly improving fundamentals, the stock yields a nice security blanket of a hefty 4% dividend. These factors explain the sizeable insider buying that has been taking place in the shares over the past month.

Finally, the technical picture is looking pretty positive. The chart is showing that an upside breakout is taking place, supported by a sharp turn up in the 50 day moving average. The 200 day moving average is not far above, settle up the possibility of a fabled ?golden cross.? This is universally positive for share prices.

This commodity is known in the investment industry as Dr. Copper, the only metal that has a PhD in economics. That?s because of its uncanny ability to predict the future of the global economy. Copper is now hinting of better things to come, along with the stock market, like a 3.5% GDP growth rate in the US next year.

The recent strength further is confirmed by longer-term charts for the Shanghai index ($SSEC), which is showing that a double bottom may well be in place. Will China permabear, Jim Chanos, finally get his comeuppance?

Copper was the first metal used by man in any quantity. The earliest workers in the red metal found that it could be easily hammered into sheets and worked into shapes, which became more complex and artistic as their skill increased. The ability to resist corrosion ensured that copper, bronze and brass remained as functional as well as decorative materials during the Middle Ages and through the Industrial Revolution to the present day.

Of the 16.7 million metric tonnes of copper produced in 2012, Chile was far and away the leader, with 5.4 million tonnes, followed by China at 1.5 million tonnes, Peru at 1.2 million tonnes, and the US at 1.1 million tonnes. This makes the Chile ETF (ECH) another great backdoor play in copper. As copper is a great electrical conductor, it is primarily used for electrical wiring, followed by the construction industry and shipbuilding, and the auto industry, especially in alternative vehicles.

It?s true that copper is no longer the dominant metal it once was. Because of the lack of a consumer banking system in the Middle Kingdom, individuals have been hoarding 100 pound copper bars and posting them as collateral for loans. Get any weakness of the kind we have seen this year, and lenders panic, dumping their collateral for cash.

The high frequency traders are now also in there in force, whipping around prices and creating unprecedented volatility. You can see this also in gold, silver, oil, coal, platinum, and palladium. Notice how they seem to be running the movie on fast forward everywhere these days? This summer, we probably got an overshoot on the downside in copper that finally flushed out the last of the weak holders.

This is why I am loading up with a bull call spread Freeport McMoRan. The gearing in the company is such that a 50% rise in the price of copper triggers a 100% rise in (FCX). More conservative ad less leveraged investors can buy the First Trust ISE Global Copper ETF (CU).

Where to Find Copper

The Great Copper Crash of 2013

Diary, Newsletter

When Dr. Copper (CU), the only commodity with a PhD in economics, suddenly collapses from a heart attack, risk takers everywhere have to sit up and take notice. Since the 2011 top, the red metal has collapsed a shocking 35%.

So called because of its uncanny ability to predict the future of the global economy, copper is warning of dire things to come. The price drop suggests that the great Chinese economic miracle is coming to an end, or is at least facing a substantial slowdown. This dark view is further confirmed by the weakness in the Shanghai index ($SSEC) which has been trading like grim death all year. Will China permabear, Jim Chanos, finally get his dream come true?

It?s a little more complicated than that. Copper is no longer the metal it once was. Because of the lack of a consumer banking system in the Middle Kingdom, individuals are now hoarding 100 pound copper bars and posting them as collateral for loans. Get any weakness of the kind we have seen this year, and lenders panic, dumping their collateral for cash.

The high frequency traders are now in there in force, whipping around prices and creating unprecedented volatility. You can see this also in gold, silver, oil, coal, platinum, and palladium. Notice how they seem to be running the movie on fast forward everywhere these days? Because of this, we could now be seeing an overshoot on the downside in copper which may never actually materialize to this extreme in equities or other asset classes.

Watch Dr. Copper closely. At the first sign of any sustained strength, you should load up on long dated calls for Freeport McMoRan (FCX), the world?s largest producer, which also has been similarly decimated. The gearing in the company is such that a 50% rise in the price of copper triggers a 100% rise in (FCX).

So what is copper telling us today? The longer term charts show a prolonged bottoming process. If this holds, we could be seeing the early days of a resurgence in the global economy. Just get Syria, Egypt, the debt ceiling crisis, and the taper out of the way, and we could be in for a major run. That is a tall order. But just to be safe, I am buying long dated calls in the next major dip in (FCX), which may have started today.

A Penny for Your Thoughts on Copper?

End of the Commodity Super Cycle

Newsletter

Traders have been watching in complete awe the rapid decent of the price of gold, which is emerging as the most despised asset class of 2013. But it is becoming increasingly apparent that the collapse of prices for the barbarous relic is part of a much larger, longer-term macro trend.

It isn?t just the yellow metal that is hurting. So are the rest of the precious and semi precious metals (SLV), (PPLT), (PALL), base metals (CU), (BHP), oil (USO), and food (CORN), (WEAT), (SOYB), (DBA).

Many senior hedge fund managers are now implementing strategies assuming that the commodity super cycle, which ran like a horse with the bit between its teeth for ten years, is over, done, and kaput. Former George Soros partner, hedge fund legend Paul Tudor Jones, has been leading the intellectual charge since last year for this concept. Many major funds have joined him.

Launching at the end of 2001, when gold, silver, copper, iron ore, and other base metals, hit bottom after a 21 year bear market, it is looking like the sector reached a multidecade peak in 2011.

Commodities have long been a leading source of profits for investors of every persuasion. During the 1970?s, when President Richard Nixon took the US off of the gold standard and inflation soared into double digits, commodities were everybody?s best friend. Then, Federal Reserve governor, Paul Volker, killed them off en masse by raising the federal funds rate up to a nosebleed 18.5%.

Commodities died a long slow, and painful death. I joined Morgan Stanley about that time with the mandate to build an international equities business from scratch. In those days, the most commonly traded foreign securities were gold stocks. For years, I watched long-suffering clients buy every dip until they no longer ceased to exist.

The managing director responsible for covering the copper industry was steadily moved to ever smaller offices, first near the elevators, then the men?s room, and finally out of the building completely. He retired early when the industry consolidated into just two companies, and there was no one left to cover. It was heartbreaking to watch. Warning: we could be in for a repeat.

After two decades of downsizing, rationalization, and bankruptcies, the supply of most commodities shrank to a shadow of its former self by 2000. Then, China suddenly showed up as a voracious consumer of everything. It was off to the races, and hedge fund managers were sent scurrying to look up long forgotten ticker symbols and futures contracts.

By then commodities promoters, especially the gold bugs, had become a pretty scruffy lot. They would show up at conferences with dirt under their finger nails, wearing threadbare shirts and suits that looked like they came from the Salvation Army. As prices steadily rose, the Brioni suits started making appearances, followed by Turnbull & Asser shirts and Gucci loafers.

There was a crucial aspect of the bull case for commodities that made it particularly compelling. While you can simply create more stocks and bonds by running a printing press, or these days, creating entries on excel spreadsheets, that is definitely not the case with commodities. To discover deposits, raise the capital, get permits and licenses, pay the bribes, build the infrastructure, and dig the mines and pits for most commodities, takes 5-15 years.

So while demand may soar, supply comes on at a snails pace. Because these markets were so illiquid, a 1% rise in demand would easily crease price hikes of 50%, 100%, and more. That is exactly what happened. Gold soared from $250 to $1,922. This is what a hedge fund manager will tell is the perfect asymmetric trade. Silver rocketed from $2 to $50. Copper leapt from 80 cents a pound to $4.50. Everyone instantly became commodities experts. An underweight position in the sector left most managers in the dust.

Some 12 years later, and now what are we seeing? Many of the gigantic projects that started showing up on drawing boards in 2001 are coming on stream. In the meantime, slowing economic growth in China means their appetite has become less than voracious. Supply and demand fell out of balance. The infinitesimal change in demand that delivered red-hot price gains in the 2000?s is now producing equally impressive price declines. And therein lies the problem. Click here for my piece on the mothballing of brand new Australian iron ore projects, ?BHP Cuts Bode Ill for the Global Economy?.

But this time it may be different. In my discussions with the senior Chinese leadership over the years, there has been one recurring theme. They would love to have America?s service economy. I always tell them that they have a real beef with their ancient ancestors. When they migrated out of Africa 50,000 years ago, that stopped moving the people exactly where the natural resources aren?t. If they had only continued a little farther across the Bering Straights to North America, they would be drowning in resources, as we are in the US.

By upgrading their economy from a manufacturing, to a services based economy, the Chinese will substantially change the makeup of their GDP growth. Added value will come in the form of intellectual capital, which creates patents, trademarks, copyrights, and brands. The raw material is brainpower, which China already has plenty of.

There will no longer be any need to import massive amounts of commodities from abroad. If I am right, this would explain why prices for many commodities have fallen further than a Middle Kingdom economy growing at a 7.7% annual rate would suggest. This is the heart of the argument that the commodities super cycle is over.

If so, the implications for global assets prices are huge. It is great news for equities, especially for big commodity importing countries like the US, Japan, and Europe. This may be why we are seeing such straight line, one way moves up in global equity markets this year.

It is very bad news for commodity exporting countries, like Australia, South America, and the Middle East. This is why a large short position in the Australian dollar is a core position in Tudor-Jones? portfolio. Take a look at the chart for Aussie against the US dollar (FXA), and it looks like it has come down with a severe case of Montezuma?s revenge.

Last week?s 0.25% cut in interest rates by the Reserve Bank of Australia took a fundamentally weak currency and sent it to intensive care. Aussie could hit 90 cents, and eventually 80 cents to the greenback before the crying ends. Australians better pay for their foreign vacations fast before prices go through the roof. It also explains why the route has carried on across such a broad, seemingly unconnected range of commodities.

In the end, my friend at Morgan Stanley had the last laugh. When the commodity super cycle began, there was almost no one around still working who knew the industry as he did. He was hired by a big hedge fund and earned a $25 million performance bonus in the first year. And he ended up with the biggest damn office in the whole company, a corner one with a spectacular view of midtown Manhattan. He is now retired for good, working on his short game at Pebble Beach. Good for you, John.

Not as Shiny as it Once Was

Here Comes the Rolling Top

Newsletter

The S&P 500 is now at 1,564, and most strategist forecasts for the end of 2013 hover around 1,550-1,600, plus or minus some spare change. So the next nine months are going to be incredibly boring. Or they won?t.

Even in a bull market, one expects to see pullbacks of at least one third of the recent gain. Apply that logic towards the 224 points the (SPX) has tacked on since the November low, and that adds up to a 74 point, or a 4.7% correction down to 1,490.

There is massive liquidity in the system, many individuals and institutions are underweight, and interest rates are still at incredibly low levels. It also appears that every foreign financial disaster results in more money getting sent to the US for safety.

Usually, the (SPX) never rises more than 9% above the 200 day moving average without hitting a correction. This year is different. I can?t remember the last time the index spent this much time at that level without a pullback.

We are therefore likely to see a rolling type market top that unfolds over the next several months. That is in contrast to a spike top, which you can spot on a chart without your glasses from 20 feet away. These tops can be devilishly difficult to trade, with the limits defined more by time than price.

If you want to see what such a rolling top looks like, take a peak at the chart for my old friend, Dr. Copper, that great prognosticator of future economic activity. He put in such a rolling top during the first eight months of 2011, and has been trying to recover ever since, to no avail.

This no doubt reflects the slowing economy and the building copper inventories in China, where the red metal is widely used as a monetary instrument. China, in effect, is on a copper standard. It is rare to see the (SPX) going up and copper dropping like, well, a bar of copper.

While the broader indexes are likely to deliver a rolling top, that is not the case with individual sectors and stocks. That means you can use these individual spikes to assist in your timing of the overall market. You need to watch the market leaders like a hawk, such as the financials and the transports. If Bank of America (BAC) and United Continental Group (UAL), suddenly crash and burn, you can bet the rest of the market won?t be far behind. This is one of the reasons why I have these two names in my model-trading portfolio, on which you should maintain your laser focus.

The consumer discretionary and retail sectors are two additional pathfinder sectors that are the most economically sensitive in the market, which also make great canaries in the coalmine. As long as consumers are packing MacDonald?s (MCD), Home Depot (HD), and Target (TGT), or burning up their Comcast (CMCSA) broadband connections buying stuff from Amazon (AMZN), you won?t see appreciable market weakness. Earnings disappointments at these businesses, which could start in three weeks, are another great precursor of market trouble.

Finally, there is another class of stocks that may lead the charge on the downside, and that is small caps. Look at the chart below for the ETF for the Russell 2000 (IWM). Small companies are always hardest hit in any slowdown because they are more highly leveraged and have less access to external financing, like bank loans and equity floatations. I made a bundle last year shorting the (IWM) into the ?Sell in May? market meltdown, and plan to do so again this year.

Of course, timing is everything, and I?ll tell you what worries me the most. The overdependence of this bull market on the largess of the Federal Reserve cannot be underestimated. Any hint that quantitative easing is about to join the dustbin of history will take the market with it.

The conventional wisdom is that our esteemed central bank won?t embark on this path until year-end. What if it surprises us with a June tightening? The bull market would die of an instant heart attack. What would trigger this? A blowout monthly nonfarm payroll number approaching 300,000, which would quickly take the headline unemployment rate close to the Fed?s publicly announced 6.5% target. With the economy perhaps growing at a 3% rate this quarter, such a development might be only a handful of Friday?s away.

So how is the genius, aggressive hedge fund trader going to deal with these opaque markets? Bet that the market is going to stay in a broad range for a few more months. We aren?t going to the moon, nor are we going to crash. We are more likely to die of ice than fire. That?s what the volatility markets (VIX) are telling us.

There are several ways to play this kind of market. If you have a plain vanilla stock portfolio, you should be executing ?buy writes? against your existing holdings to take in extra premium income. With the bull move five months old, call options are trading at historically rich levels. This low risk, high return strategy involves selling short call options against existing stock positions. If your stock gets called away, you just say ?thank you very much? and buy it back on the way down.

For the more aggressive, you can add naked short sales of deep out of the money calls one month out. You don?t get rich with a strategy like this, but you earn a living.

You might also buy some deep out-of-the-money index puts for pennies. They are now trading near the cheapest prices in history. One market hiccup, and these things double very quickly.

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Looking for the Next Bull Market

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Where to Find Copper

Hmmm. Doesn?t Look Like Ben Bernanke

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