Stock Report: HudBay Minerals (HBM-T) has a large base

Originally published April 7, 2015 at www.na-marketletter.com

HudBay Minerals has a large base.

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HudBay Minerals had a sharp decline from $27.04 in July 2007 to $2.75 in December 2008 (A-B), followed by a recovery rally to $15,38 in November 2009 (C). The stock then settled in a horizontal trading range mostly between $9 and $18 (dashed lines) and then in another range between $7 and $12 (long lines). This price action created a bullish technical pattern known as a Delayed Ending. A decisive move above the $12 resistance line would constitute a breakout from this formation and the start of a new up-leg.

Behaviour indicators including the 40-week Moving Average (40wMA), the VSI and the MACD (see lower panel) confirm the bullish status. Only a sustained decline below ±$9.95 would suggest additional base-building is required.

A rise above $12 would confirm a technical target of $15 (a 38% appreciation potential from current levels). Higher targets are also visible.

 

The S&P/TSX composite – target 16,500!

The following Market Comment was published on March 24, 2015 – for subscribers only! To receive the latest Market Comment and stock ideas, please register for a free trial at http://www.na-marketletter.com

One of the key mechanisms of every bull market is sector rotation. Not only does it allow tired sectors and stocks to rest but also permits new leaders to emerge and carry the bull market higher. This time it’s no different.

For the last five months, while the U.S. indices have been reaching new highs, the S&P/TSX Composite Index has been locked into a horizontal trading range roughly between 13,650 and 15,300. During this time, we have repeatedly said that Toronto is most likely to come alive toward the tail end of this bull market, as it has done in previous market cycles.

Firstly, the S&P/TSX composite has been consolidating, or in other words building a base, for almost six months. The size and length of this formation could support a strong rally and a 16,500 target.

Secondly, the S&P/TSX composite has a heavy weighting in late-cycle performers such as Resource, Energy & Gold stocks. A strong rally in those sectors could have a positive effect on this index. All of these sectors suffered significant declines in the last few months and they could start a recovery rally. While Energy and Resource stocks lack solid base patterns, there are numerous Gold stocks with strong foundations that could support a significant up-move.

Thirdly, as this bull market progresses, some investors may start taking profits in Industrial and Technology stocks and looking for “bargains” in other areas of the market – Resource, Energy and Gold sectors could be the beneficiary of such a rotation.

Fourthly, the latest sentiment data shows investors are worrying about the longevity of this bull market. They not only view Resource stocks as a “lost cause” but anticipate further declines. It is music to our bullish ears!

Finally, a plethora of technical indicators such as the percentage of stocks above the 200-day moving average, rising 50-and 200-day moving averages, the MACD, to name just a few, point to better times for the Toronto index.

Only an abrupt end to this bull market and a decline below the 13,650 support would cancel the index’s bullish potential.       

The S&P/TSX composite has spent the last six months in the waiting room of this bull market. With a strong technical base and heavy weighting in late-cycle leaders, the Toronto index has all the right ingredients to break the bullish monopoly of US indices. Its firm grip on the 15,000 level suggests the S&P/TSX has already set its sights on the recent all-time-high of 15,685.

 

The (sector) rhythm of bull markets

In simple terms, a bull market is a period of rising stock prices. In other words, it is the time when market conditions are favourable to owning stocks. Despite such a friendly environment, some investors fail to participate or maximize profits.

The most common mistake is to ignore the sector rhythm of a bull market. Let us explain.

Think of the rhythm of a bull market as having moods just like people. Sometimes you feel well and you want to play sports, while at other times you want to stay at home and read a book. In the same way, sometimes a bull market wants to play it safe and favour Consumer Staple stocks, while at other times it feels bold and adventurous and goes with Gold or Resource stocks. Watching the rhythm of a bull market could provide investors with valuable insights into sector and stock selection but also provide a hint about the age of the bull market.

There are three major principles: 

  1. Every sector will get its five minutes during a bull market.
  2. Each bullish cycle has a leading theme, sector or area that performs the best and leads the entire bull market higher.
  3. Each bull market will undergo a sector rotation; while one area of the market rests, the other sector leads, and vice versa.

Keeping these principles in mind, there is a certain rhythm or sequence in which particular sectors perform at each stage of a bull market.

The first sector to show its strength is Financials. They usually bottom first and lead the advance from the bear-market lows.

Then, industrials follow. It becomes clearer that a new up-trend is underway and investors look for large, quality stocks that would benefit from improving economic conditions.

More and more investors recognize the new bullish trend and want higher returns so they turn to the Healthcare and Technology sectors.

Along with rising stock prices and an improving economy, consumers start feeling better about their prospects so investors turn toward Consumer stocks.

Finally, toward the end of a bull market, investors’ confidence becomes sky high, the appetite for risk is increasing and it is time for Resource and Energy stocks.

The final sector to come alive at the end of a bull market is Golds.    

Please note that these are just guidelines and there are exceptions. For example, the sector that led the market out of the 2009 lows was Golds, most likely due to the nature of the preceding decline.

Despite these exceptions, investors who watch the sector rotation scheme during bull markets not only improve their stock selection and maximize their profits but they also get a hint about the longevity of the bull market. It is worth tuning in to the rhythm of the market.

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Is the current pullback in Gold stocks a buying opportunity?

The rally out of the mid-December lows has dramatically improved the technical standing of many Gold stocks. Early leaders such as Franco-Nevada (FNV-T) or Rio Alto Mining (RIO-T) had breakouts from large base patterns and led the recent rally. Others, such as Agnico-Eagle (AEM-T), Guyana Goldfields (GUY-T) or Fortuna Silver Mines (FVI-T) rallied toward their major resistance zones but stopped short of breaking out from their horizontal trading range.

Most importantly, many Gold stocks rallied above their 50- and 200-day moving averages and, in many cases, turned them up. Those leaders are currently undergoing a pullback toward their 50- and 200-day moving averages. It is crucial that these stocks find support above or near their 200-day moving averages.

Aggressive investors should view the current weakness as a buying opportunity. Register and receive our latest Gold stock reports at na-marketletter.com

 

 

Bob Farrell’s ten observations

Bob was the Chief Technical Analyst at Merrill and one of the most respected and knowledgeable analyst on the Street.  As 2015 begins, we thought that
 re-reading these again might help your investment plans.

  1. Markets tend to return to the mean over time.
  2. Excesses in one direction will lead to an excess in the opposite direction.
  3. There are no new eras – excesses are never permanent.
  4. Exponential rapidly rising or falling markets usually go further than you think but they do not correct by going sideways.
  5. The public buys the most at the top and the least at the bottom.
  6. Fear and greed are stronger than long-term resolve.
  7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue chip names.
  8. Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend.
  9. When all the experts and forecasts agree – something else is going to happen.
  10. Bull markets are more fun than bear markets.

 

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EMC is in the midst of a major breakout.

In our piece “Waiting for Godot,” we said that technology stocks (soft assets) had replaced resource stocks (hard assets) as a new market leader.

The majority of tech stocks had undergone a ten-year repair process and built lengthy base patterns pointing to significantly higher targets. Many of these stocks have had huge breakouts from their base patterns and are now leading the market advance – Microsoft (MSFT, 32% gain since our recommendation) and Sierra Wireless (SW, 109% gain since our recommendation) are just two recent examples. Many others are on the verge of major breakouts. Here is one example.

emc_Blog

Chart courtesy of http://www.stockcharts.com

EMC declined from a high of $99.03 in September 2000 to $3.74 in September 2002 (A-B). Then, the stock began a lengthy process of base building consisting of numerous rallies and pullbacks. During this time the stock intercepted its 40-week moving average on numerous occasions – a normal occurrence during a repair process.

For the last four years EMC has been trading within a horizontal range roughly between $20 and $30 (see shaded area). The recent rise to $30.05 suggests the stock is in the midst of a major breakout. A decisive move above $30 would confirm such a breakout and the start of a new bullish phase toward significantly higher targets.

For more investment ideas please visit www.na-marketletter.com

 

Concerned about the sell-off?

Below please find an excerpt from the latest Market Comment by Ron Meisels and Olaf Sztaba. To read a full text and receive the latest investment ideas please register for a free-trial at na-marketletter.com

Our recent Market Comments applauded the bullish action but warned about “the seasonal chills” that could hit the market, which could eventually lead to a much-needed “traditional autumn scare.” Indeed, following the mid-September failure to reach new highs, the North American markets succumbed to corrective forces. From the start, triple-digit tribulations hit the market and very quickly spooked participants.

This 180º turn has been captured by the latest investors’ sentiment data. The AAII shows that after months of bullish dominance, both sides have reached near equilibrium – 35.4% for the bears and 41.8% for the bulls. This change speaks well for this market’s ability to control investors’ enthusiasm. It also suggests that those who were worried about the end of this bull-run may take a deep breath for now. The bulls are just quitting too easily to indicate a major top.

The plethora of technical indicators, including the Net-Day index and the smaller number of 52-week highs, suggest the market reached oversold levels indicative of a turnaround (similar conditions were present near the January, February and August lows).

As always, individual stocks may differ in their technical status. Some early leaders have already reached their objective for the correction – in most cases it is the 200-day moving average. They may spend the rest of the month building a short-term base for further gains once the market catches the seasonal fever. Other stocks may use this time to continue the pullback toward their objectives. Watch for our upcoming list of buying opportunities in key sectors (to receive this list, register for a free trial at na-marketletter.com).

The autumn correction is doing its job. Indices and stocks are pulling back to their 200-day moving averages, support levels are being tested, the bulls are in retreat and the wall of worry is rising up again. An ideal conclusion to the current correction would be a fear-induced sell-off, finished by a sudden reversal.

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