Copper, Semiconductors Will Lead Recovery

With the S&P 500 Index up 19% in the past month, people are wondering if the stock market hit bottom in March. Before you make your call, let's look at some early economic indicators.

The first measure is copper, the metal's spot prices and stocks in the copper business. Demand for copper rises when manufacturing activity picks up, offering an early sign of growth.

The chart below shows three ways to invest in copper: the iPath DJ-AIG Copper Total Return Sub-Index Exchange Traded Note (JJC Quote), Freeport-McMoRan (FCX Quote) and Jiangxi Copper (JIXAY Quote).

JIXAY Daily BigCharts.com

Not surprisingly, the correlation among the three is high. The iPath DJ-AIG Copper Total Return Sub-Index ETN is a way to access the commodity. Freeport-McMoRan is a mining company that recently became a major player in copper with its purchase of Phelps Dodge. Jiangxi is the Phelps Dodge of China.

Building and manufacturing requires copper. The need for copper should push spot prices higher, which brightens the prospects of copper stocks like Freeport-McMoRan and Jiangxi. In contrast to the stock market's two-week panic rally, the copper chart shows a gradual decline between June and December, follow by a slow increase.

Semiconductor sales are another early indicator of economic activity. More products and companies rely on semiconductors than we realize.

The second chart shows recent action in shares of Taiwan Semiconductor (TSM Quote), Intel (INTC Quote) and the iShares North American Technology-Semiconductors Index Fund (IGW Quote). Taiwan Semiconductor is one of the better-known semiconductor makers in Asia. Intel is the industry's mega-cap name. The iShares North American Technology-Semiconductors Index Fund provides access to semiconductor companies without having to pick individual stocks.