A Light at the End of the Mine Shaft

The metals & mining sector was one of the groups hardest hit by hedge fund deleveraging in the second half of 2008. Most stocks in the sector lost more than 70% of their value since summer 2008, but now an opportunity has opened for the bulls in this group.

Technical improvements and bottoming action in the basic material stocks in mid-December have held and continue to develop along a bullish line. Many names in the metal & mining sector group are providing interesting entry points at this level, including Freeport-McMoran (FCX - commentary - Cramer's Take), which jumps out as an opportunity on the long side.

The drop in commodities was shockingly swift and commodity-related stocks fell right along with them. As the cornerstones for many hedge fund portfolios headed into this bear market, basic materials and commodity stocks were ruthlessly cut, but we sense that the deleveraging is at an end. If traders start looking around the bend and see any type of improvement down the road for the global economy, commodities and commodity-related names are set for a significant recovery from current levels.

Copper HG Composite

Freeport-McMoran is one of the largest copper and gold miners in the world. The company has significant exposure to gold mining but is viewed as a copper play. Copper prices fell almost 70% from the highs set midsummer, but they have made some technical improvements recently. The commodity has formed a bullish momentum divergence at the lows and rallied out of the downtrend channel.

This action suggests that copper is switching from a bearish phase to a bottoming phase. The downtrend is likely over, but it still needs time to base and develop a turn. However, it appears that Freeport-McMoran is getting out ahead of the commodity.

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At the time of publication, John Hughes and Scott Maragioglio were long FCX. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.