The optimism that took equities higher in October was also very stimulating for commodities and currencies that are closely tied to risk appetite. Crude oil vaulted from $75 to $95, copper made a double bottom just above $3 per pound and reached back up to $3.70, and the Australian dollar made its biggest one-month advance ever, launching from 94 cents up to nearly $1.08.
These dramatic moves were symbolic of the both of the emotional extremes we see near market bottoms: panic pessimism and outrageous optimism. Actually the latter probably isn't as outrageous as it is mixed with its own brand of fear, as market participants worry they missed the bottom and hedge funds push the momentum to squeeze maximum blood from the bears.
And focusing on commodities and currencies, the moves are more extreme because of the sensitivity of materials and cyclical growth areas to the possibility of a global economic slowdown. The bull market in energy and materials that led us out of the 2009 recession trough also got hit the hardest when recession fears surfaced this past summer.
For months I used crude and copper, and even the euro currency, as my barometers of how likely a recession was here. My critical price levels to watch were $80, $3.50, and $1.35 respectively.
All of these price levels were breached. And all instruments are back above them now. Thus is the nature of the emotional market extremes.
The AUD King
I want to introduce readers to more currency perspective over the next few months, since that was my trading laboratory for nearly 10 years starting with the introduction of the euro in 1999. Currencies taught me more about global finance and investment flows than any economics class. And the Australian dollar -- AUD is the interbank quote symbol -- was always my favorite to trade.
My "Aussie" chart above is a good one to start with. Australia has been a top recipient of China's growth and good fortune. Rich in materials and energy resources, the country's exports to China have made it one the strongest developed economies.
The fact that short-term interest rates never fell below 3% and nearly got to 5% is a good indication of the gang-busters cyclical growth in the Australian economy. The country's two heavy hitters involved in minerals mining from iron ore, coal, and potash to copper, uranium, and diamonds, BHP Billiton (BHP - Analyst Report) and Rio Tinto (RIO - Analyst Report), are excellent examples.
Rio has ongoing deals within China to mine many flavors on their joint wish list, including coal, uranium, and potash, and they just bought a Canadian uranium miner. BHP has been on the prowl to expand its materials and energy assets for years. Remember when they tried to buy Potash (POT - Analyst Report)?
This summer, BHP completed their acquisition of PetroHawk Energy, getting a solid foothold in the North American petroleum and natural gas markets. And the penetration of NA markets by the Eastern powers will only continue. You may remember when China's CNOOC (CEO - Analyst Report) tried to buy UNOCAL in 2005.
They were rebuffed by American patriots everywhere. But persist they did with a creative deal about one year ago to invest $2 billion in a partnership with Chesapeake Energy (CHK - Analyst Report) for access to its Eagle Ford shale assets.
My recession level on the AUD/USD currency pair was $1.00 or "parity." We overshot that one by a good margin too. But now that we are strongly back above, and within a stone's throw of all-time highs near $1.10, things are very interesting.
You want to keep your eye on the Aussie. A move above $1.10 is very bullish for the global economy.
Why? Because the Aussie is an excellent barometer of cyclical expansion. And it is closer to new highs than our own stock market. It led the charge out of the recession trough in 2009, and it's leading the risk rally again.
Note: The current earnings outlooks for BHP and RIO are both poor enough to earn them a Zacks Rank of #4 (sell) and #5 (strong sell) respectively. If the global cyclical material rally continues there may be a turn and some opportunities here. Until then, exercise caution with these companies.
Kevin Cook is a Senior Stock Strategist with Zacks.com