The Return of the Commodity Trade

The recent correction hit the commodity-related stocks very hard. This was expected, since the commodity-related names, such as the metals and mining stocks, led the market higher and since the group was "overowned and overloved" by the hedge fund set.

We would have expected these stocks to be completely left behind by any recovery, as portfolio managers and "fast money" traders who took some painful losses in the sector would be very hesitant to return. The weak economic story and the potential for recession from the subprime mess should also keep traders away from these economically sensitive names.

In spite of all the negatives lined up against the group, we are seeing an impressive rally nonetheless. If a group of stocks has every reason to go down but rises instead, then there is a message there.

Metal Sector Breadth

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It appears that the global growth story remains intact and that global commodity consumption isn't slowing down in spite of the subprime crisis. We see confirmation of this demand in the shipping rates for dry-bulk cargo, such as iron ore, which continues to rise and suggest that demand from Asia remains high.

The real global economic story is not a domestic slowdown but the continuation of hypergrowth from Asia. The commodity-related stocks are tied to the prospect of growth in Asia, and a potential recession in the domestic economy doesn't seem to really matter for now. As long as the Asian economies remain strong, the commodity stocks should work.

One of the largest commodity-producing companies in the world is BHP Billiton (BHP Quote). The company is diversified across all the major commodities and is a proxy for the entire metals and mining sector.

Billington BHP

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The stock rallied strongly prior to the correction as the market narrowed and commodity stocks surged higher. BHP then formed a "V" bottom during the selloff and subsequent rally. The breakdown in mid-August retested the large base formation, which BHP formed during the better part of 2006.

This is an interesting recovery off of the lows, and it suggests that the stock may simply resume the uptrend started in April. We would look for the stock to consolidate the gains at this level and set up for another push to the upside. A breakout over $69 would reaffirm the primary uptrend and suggest that the bulls are ready to make another move to the upside.

The Asian growth story remains intact, and BHP is the premier commodity company in the world. As long as Asia keeps growing, the story for commodity-related stocks looks solid, and the bulls appear willing to return to the group and take these stocks higher.