Feb­ru­ary 2, 2012

As the say­ing goes, “every dog has its day” and global mar­kets appear to have fol­lowed this his­tor­i­cal trend lately as last year’s dogs became the dar­lings of Jan­u­ary. Notably, small-caps, cop­per and junior resources stocks have climbed recently, indi­cat­ing that momen­tum has shifted.

Take a look at the small-cap Rus­sell 2000 Index which was dec­i­mated in July, days before the 50-day mov­ing aver­age fell below the 200-day mov­ing aver­age. I dis­cussed how traders buy or sell off of these short-term and long-term mov­ing aver­ages when I wrote about the “golden cross” a few weeks ago.

This year is off to such a great start that if small caps con­tinue this momen­tum, we should see the 50-day mov­ing aver­age for the Rus­sell 2000 cross above the 200-day soon. This would likely drive new investor inter­est in this space.

Cop­per also took a few major blows last year, first in July and then in Sep­tem­ber as a result of the carry trade. To gain a yield advan­tage, large investors use the carry trade to advan­ta­geously bor­row in yen (because inter­est rates are low), con­vert it to a stronger cur­rency and invest in higher-return, higher-risk assets, specif­i­cally com­modi­ties and dividend-paying emerg­ing mar­kets stocks.

When the yen began to strengthen against the dol­lar in August and again in Octo­ber, Japan inter­vened to weaken its cur­rency. The yen quickly reversed, caus­ing the higher-return assets to decline.

As our com­modi­ties table shows, cop­per was among the worst-performing com­modi­ties that we track, declin­ing more than 20 per­cent last year. This lag­ging per­for­mance came despite supply/demand fun­da­men­tals that argued for higher prices.

We expected cop­per to even­tu­ally revert to its long-term mean and it only took a few pos­i­tive dri­vers to drive prices higher. One of these dri­vers was the JP Mor­gan Global Man­u­fac­tur­ing Pur­chas­ing Man­agers’ Index cross­ing above the three-month mov­ing aver­age, which occurred at the end of Decem­ber. Ninety per­cent of the time, when this has hap­pened, cop­per was pos­i­tive over the next three months, with a median return of 10 per­cent over the fol­low­ing three months.

Addi­tional dri­vers that have pro­vided the impe­tus for higher prices include a sig­nif­i­cant increase in money sup­ply, inter­est rate cuts around the world, and cen­tral banks drop­ping their reserve rate for banks.

Look for this trend to continue.

Also Read:

• Antic­i­pat­ing the Golden Cross
• Junior Resources Com­pa­nies Set to Outperform?
• Have Winds Shifted to Pro­vide Relief to Investors?
• The Peri­odic Table of Com­mod­ity Returns

All opin­ions expressed and data pro­vided are sub­ject to change with­out notice. Some of these opin­ions may not be appro­pri­ate to every investor.

The Rus­sell 2000 Index® is a U.S. equity index mea­sur­ing the per­for­mance of the 2,000 small­est com­pa­nies in the Rus­sell 3000®, a widely rec­og­nized small-cap index. The Pur­chas­ing Manager’s Index is an indi­ca­tor of the eco­nomic health of the man­u­fac­tur­ing sec­tor. The PMI index is based on five major indi­ca­tors: new orders, inven­tory lev­els, pro­duc­tion, sup­plier deliv­er­ies and the employ­ment environment.

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., and a Toronto, Canada native, which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure. The company’s funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper’s top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper’s top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories. Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of “The Goldwatcher: Demystifying Gold Investing.” He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies. Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron’s, The Financial Times and other publications. Read more from the author/contributor here.

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