Glencore shares ascend over dark world of metals

London’s major mining shares have latched on to global stock markets’ rude awakening to the New Year.

But whilst their scurry back to the bottom of FTSE was predictable, one surprise is that investor ‘rotation’ within the sector may currently favour Glencore.

Still 2015 for Chinese stocks

China’s sudden stock market relapse on Monday sent its main indices down 7%, their worst one-day drop since the August crash.

The supposed trigger was weak macroeconomic data.

You and I, however, might suspect a combination of other factors were at least as likely to have been the triggers.

We could cite planned removal of trading restrictions in place since last summer, new curbs on stock market investments by big Chinese insurance firms, and the return of most participants from holidays.

Major miners shrink further

Either way, after eye-catching rallies in the closing days of 2015 on a raft of official Chinese pronouncements about the need to reduce metal industry gluts, Anglo American, Rio Tinto, Glencore and BHP Billiton returned to the multi-year lows where they closed another calamitous year.

There was no major departure by these shares and the wider sector they occupy, compared to the trend over the last several months.

The main question for those market participants determined to keep a hand on high-profile UK mining stocks is whether any significant change in their relative performance can be expected in the medium-to-long term.

Obviously, the question is just one facet of a much wider cluster of thoughts investors need to have in order to accurately assess the outlook for metals and the mining sector in the year ahead.

Such an analysis would need to touch on the continuing impact of China’s deflating economic machine, further unfurling of what still looks like a ‘secular bull phase’ in the dollar, the global economies’ reaction to same, and, not forgetting that seemingly bottomless sell-off in oil prices.

I would expect the narrative to unfold in the weeks and months that follow, rather than be a very useful exercise in the immediate term.

What might be useful is a summary of the relative performance of the biggest UK mining shares against a sector benchmark.

It’s worth cautioning that such perspectives are still likely to be arbitrary and subjective.

On the other hand, that basic assessment can be a starting point for the type of exercise we suggested above.

Introduction to a ‘magic circle’

One quite simple tool available is the Relative Rotation Graph™.

Paring back explanation of this technology to the bare minimum, we can say the RRG offers a visual presentation of how a group of securities are performing relative to a selected benchmark, over an adjustable time frame.

It places assets in a graphic representation of their performance across four quadrants called ‘improving’, ‘leading’, ‘weakening’ and ‘underperforming’.

The key metrics are the RRG versions of an asset’s ratio against the benchmark, Relative Strength Ratio, and momentum vs. the benchmark, Relative Strength Momentum.

One important proviso is that the system is a bit of a ‘black box’: the precise metrics against which performance is calibrated are proprietary and not publicly available.

On the other hand, it may not be necessary to know or fully understand the inner workings of the metrics especially given that the data they produce is codified within a conventionally understood framework.

Glencore swings higher

Necessary cautions aside, weekly checks of constituents in the FTSE 350 Mining Index look instructive over a 12-week view within the RRG.

A key point in judging performances is that wider navigation across the chart symbolises clearer trends and trend changes.

Assets, such as stocks, in our case that circumnavigate over a narrower circle are judged within this system as not showing significant changes over the time frame.

Each week leading up to the latest one is represented by a colour-coded triangle.

The current week is a square on these charts.

Our rotation chart reveals that relative to the comprehensive sector benchmark, base metals miner and commodities trader Glencore has been a clear ‘improver’.

Also that precious-to-base-metals and coal mining conglomerate Anglo American, BHP Billiton, and mid-cap Vedanta Resources have been lagging.

If the aim of this article was to rank miners by the level of their drama in 2015, few would argue that Glencore was the winner.

Its shares are still recouping from the severe case of stock market flu they caught last autumn due to combined exposure to deeper-than-peer group average debt, and low visibility into the extent of its trading arm’s dependence on credit.

RELATIVE ROTATION GRAPH™ – GLENCORE VS. CONSTITUENTS OF FTSE 350 MINING INDEX

Please click image to enlarge

The notion that Glencore is making up ground on a relative basis having been punished more than its peers on the same wins some corroboration from the more conventional comparative chart below.

Here, shares of the biggest UK-listed mining giants are rebased to three months ago.

None of these shares covered themselves in glory, but Glencore (orange/red gradient) still relatively outperformed.

It lost 10% compared to the biggest 3-month loser Anglo which fell about 50%.

MAJOR UK MINING STOCKS REBASED TO 3-MONTHS AGO

Please click image to enlarge

No winners

We come crashing back down to reality of course, if we dare to look at these shares over a year (not pictured).

In that case, Rio ‘outperforms’ with a 36% fall, whilst Glencore and Anglo are the two worst by a distance with routs of 71% and 76% respectively.

In my view little can be surmised from such reckonings, beyond the relative extent of pain the FTSE’s miners (and their investors) have experienced of late ahead of a year that shows few signs of improvement in demand for their wares.

On that basis, Glencore might well be a standout as it accelerates to recover to the similar dire levels of its peers.

Let’s be clear though that there’s no suggestion Glencore is in any way de-coupling from the unremitting weakness engulfing the entire sector.

From a technical analysis basis, Glencore shares clearly remain challenged by significant investor ‘resistance’ to any sort of recovery above £1, as seen within its daily chart.

The shadow of its biggest one-day sell-off in September has pretty much governed the stock’s progress since Glencore doubled from late 60p lows within weeks, before failing anew just before 125p.

GLEN remains within the orbit of that engulfment.

Traders will also be mindful that the 161.8% retracement of that one-day fall of as much as 30% in September is once again capping the shares.

In fact, with Slow Stochastic momentum still falling from a recent overbought state, the current down leg may run further, notwithstanding clear support seen in December, on a closing basis whenever bears attempted to push the stock below 80p.

DAILY CHART – GLENCORE

Please click image to enlarge