Mr Market is feeling a touch better about life right now. The US market has bounced this week. The Fed chairman gets the credit for recent comments.
Recently we’ve made the case for a bright outlook for 2019, as far as stock markets are concerned. There’s no need to go over that again.
Let’s contemplate something else for today.
Because one of the mysteries next year is what the US dollar (USD) will do. This is important.
A strong dollar suppresses the appeal of opportunities around commodities and emerging markets, for example.
Now, Morgan Stanley is making the case for the USD to drop in 2019. That could be very good news for Aussie speculators…
Morgan Stanley’s head of foreign exchange thinks global capital from Japan, China and Europe is less likely to seek a home in the US.
If that call is right, the demand for US dollars will drop.
One call from an investment bank is no way to base an investment strategy.
But we can see an inkling of this possibility in how resilient the Aussie dollar remains. It’s now back over 73 cents to the USD.
I suggested this as a possibility a while back. That call was based on the enduring strength in the iron ore and coal prices over 2018.
Now iron ore is weakening and yet the strength in the Aussie dollar remains.
I can’t really tell you with any great confidence why this is so.
But it doesn’t really matter. The weight of money can guide us.
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A man called Peter Brandt is a trader I check in on from time to time. He’s a classical chartist — or technical analyst, if you prefer.
Recently he suggested that the Aussie dollar might be forming what’s known as a ‘head and shoulders’ bottom.
See for yourself…
Source: Factor Trading Service
The idea here is that the Aussie dollar is more likely to start trending up again.
That’s the kind of wave a trader like Peter can look to surf for as long as it runs.
Here’s the main point though: Periods of US dollar weakness historically coincide with rising commodity prices.
That could bring the Aussie resources sector into a major spotlight next year.
There’s also data that suggests the fundamentals around commodities are tightening…
Lowest inventories since 2008!
You’ve read all year about the trade war. It’s dampened enthusiasm around any bull case for world trade. And fair enough.
However, Reuters just reported that China’s imports of refined base metals are higher than a year ago.
Should China and the US come to a conciliatory agreement soon, the market psychology has every chance of switching here.
For example, the inventory levels of zinc on the London Metal Exchange continue to run down.
They are at the lowest level since 2008. But the cash price will not budge higher.
This would suggest the market is in ‘wait and see’ mode.
However, low inventory levels could spark anxiety about supply if it persists.
But the biggest bellwether for the commodity markets going forward is likely to be copper.
They call it ‘Dr Copper’ for a reason. Any bullish sentiment around the world economy and a weak USD will show up here.
But how will you know?
Let the market guide you…
How to filter out the forecasts
Forecasts are a dime a dozen in financial markets.
One way to filter out this noise is to keep an eye on stocks pushing into 52-week highs.
If you see a group of stocks in the same sector doing this, then there’s a high likelihood the market is pricing in good times ahead across the board.
This is the best way to find 2019’s next ‘hot’ commodity.
For example, this is what happened with lithium stocks in late 2015 and early 2016.
Some of the ensuring gains were in the hundreds of percent.
Once you see a whole sector moving, then you can start digging into the different individual projects.
Of course, I’m referring to a more speculative, short-term trading approach with this suggestion.
Longer-term investments mean knuckling down and studying individual projects and the management teams who run them.
For example, the junior gold stock Bellevue Gold Limited [ASX:BGL] took off like a rocket in September.
That’s not because the gold price is hot and the sector is moving. In fact, the opposite is the case.
It’s because Bellevue has reported cracking gold discoveries unique to its project. (Talking of gold, if you haven’t secured your copy of Jim Rickards’ The New Case for Gold yet, do so here. All it will cost you upfront is postage and packing).
But all we want to know for now is whether commodity stocks in general could be lucrative next year.
Start here: Early in 2019, keep an eye out for increasing volume and new highs across the Aussie mining sector.
That will give you some indication of whether a weakening USD — should this outcome eventuate — is translating into a bullish outlook for commodities and related stocks.