Copper's up. Let's go buy a copper stock. Oil's flying, give me an oil. Interest rates are going higher. Bet against a utility.
Yep, we're in a frenzy to buy or sell whatever's working at that moment and it's producing decisions that are so split-second and so nonsensical that sometimes you have to sit back and laugh.
So let's take copper. The red metal's been going down, literally, for five years. There's too much of it. The Chinese are taking less of it. People are substituting aluminum for it, or polyvinyl chloride piping if possible, because they are cheaper.
But for the last month, copper's doing something it hasn't done in ages. It's been going higher. How high? Well, if you chart copper, which you can do by monitoring the JJC, the symbol for the Bloomberg copper index, you can see it's actually bottomed at $22 in the middle of January and is now back to where it was at the end of the year. In fact, Carley Garner, one of my favorite chartists, has pegged copper as a potential breakout metal and is very bullish on it.
What's happened to possibly cause a bottom in copper? We know the Baltic Freight Index, which measures the cost of shipping big bulk goods like copper, has been trading up ever so slightly off an incredibly low base. We know there have been cutbacks in production because the copper companies have been doing so badly. Hmm, demand up, supply down -- voila, a possible bottom.
If you are in the stock market, you think, OK, give me a copper producer. It just so happens that Freeport McMoRan (FCX) sells copper. In fact, it just sold a slice of one of its copper mines for $1 billion to try to fix its balance sheet.
Why does it have to fix its balance sheet? Because it has $20 billion in debt from an oil-company buying spree at the top of the market.
Well, looky here, oil's up, too, having rallied to $33 a barrel, up from $26 not that long ago.
Copper's flying's, oil's not dying, let's go buy some Freeport! Now of course, I wish life was that easy. In truth, Freeport's in big trouble and it needs to raise cash any way it can. But why let the facts get in the way of a good story?
Next thing you know, traders are piling into this stock and it's up 7%.
When we see oil rallying like this, as it seems to have for days, what do traders want to do? They want to buy the oil companies that need oil to really fly, like the big oil drilling companies or even the heavily indebted companies that have been such total dogs. So what goes higher? How about Ensco (ESV), the gigantic offshore oil platform company? Why not? It's cut costs to the point that when it reported last night, it actually made more money than expected. So what if it cut its dividend by 93%? It's a survivor, especially if oil goes higher. Next thing you know, it is up 12%. When traders see that gain, they immediately reach for Transocean (RIG) and Diamond Offshore (DO), even as they are doing far worse. Who cares? Party on! So Transocean and Diamond are up 10% and 5% apiece.
What's wrong with this game? Why shouldn't you play? Because if copper's a head fake, you just bought the worst-of-breed copper maker. If oil's just a short squeeze, you have purchased the companies with the least hope of advancement that could retrace their gains in a nanosecond.
So here's my advice. You want the best way to play a rotation? Then quit your job and day-trade because these moves are ephemeral and are often over by the time you see them. They are almost surefire ways to lose money because you are buying the worst, most leveraged junk and betting someone even dumber than you will take you out. It's a fool's game. Enjoy watching it. But don't participate unless you are willing to be concussed by the next rotation out of your stocks and into those that do best when copper and oil get crushed, because you have no idea what you are buying beyond knowing that everyone else is doing it and that's somehow enough to justify the trade.