The metals and mining sector has two periods of seasonal strength during the year, from the end of October to the end of December and from the end of February to the end of May. The latter period is the better of the two. Average gain per period during the past 20 years is 7.5 per cent.
A major reason for strength during the February to May period is increasing seasonal demand for base metals. Demand for copper , zinc, lead, nickel increases each spring with the spring construction ramp up and the traditional new car purchase season.
Demand for base metals is rising this year thanks to a recovery in world economies, particularly in North America, Japan, China, India and emerging nations. Partially offsetting this is an anticipated decline in Europe.
The focus is on increasing demand from China. China currently consumes 40 per cent of the world's copper. China's economic growth recently has slowed to approximately an 8.5 per cent annual rate. However, the People's Bank of China announced nearly two weeks ago that reserve requirements for China's major banks have been reduced, signaling an important change in monetary policy. The Chinese government is intent on adding economic stimulus. Incremental economic growth in China will have an incremental impact on the demand for the metals and mining sector.
On the charts, the S&P/TSX Global Mines and Metals index at 1,193.60 has a positive and improving technical profile. Intermediate trend is up. A break above 1,258.22 completes a bullish reverse head-and-shoulder pattern. The Index recently bounced from near its 50-day moving average at 1,159.60 and moved above its 200-day moving average at 1184.57 last week. Strength relative to the S&P/TSX composite index has been positive since the beginning of October. Short-term momentum indicators began to recover from oversold levels last week. Preferred strategy is to accumulate equities and exchange traded funds at current or lower prices for a seasonal trade until May.
Preferred investment choices range from exchange traded funds to high quality, base metal producer stocks including Freeport McMoran Copper & Gold , Teck Resources , Inmet Mining and Hudbay Mining . Exchange traded funds in the sector trading in Canadian Dollars include the Claymore S&P /TSX Global Mining ETF and the BMO Equally Weighted Global Base Metals ETF . In addition, Horizons offers a double leveraged product, the Horizons Global Metals Bull . All show similar technical patterns.
Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. . Daily reports are available at www.timingthemarket.ca/. He is also a research analyst for Horizons Investment Management Inc. All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment Management.