Tickers in this Article: SCCO, FCX, BHP, RPT, TCK, IVN
A recent technical analysis report suggested that copper and copper stocks were due for a fall. The run up in copper prices this year as well as the stock market's recent trends indicate to technical analysts danger for copper and copper stocks. Is this the start of a long-term dip? Or does this technical trend mask a coming long-term fundamental opportunity for copper stocks?

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First The Run Up, Then The Fall
Copper prices have doubled in the last year. Copper mining stocks have responded with increasing earnings and their stock prices have been bid up. Southern Copper (NYSE:SCCO), a stock which cratered at nearly $10 a share in 2008, has been on an almost steady rise into the low-$30's, and currently trades at $30.75. Freeport-McMoran (NYSE:FCX), the major copper and gold producer, has likewise been on a strong run this year. Copper, which had risen in the previous commodity bubble to the $4 per pound mark only to fall by more than half, has risen again to trade at around $3.50 per pound recently. So shouldn't caution be in order as far as investing in any copper mining stocks? Doesn't the current price for the metal and the stock run ups signify another imminent steep correction?

Short Term Versus Long Term
There is no doubt that investors who buy commodity stocks should always be aware of the fundamental situations which underlie the companies' business. The current situation is no different. With the recent earthquake in Chile, along with the potential for China to scale back some of its copper buying, it's certainly worth noting. Also, the dramatic rise in both the metal's price and the mining stocks should signal a caution for fundamental investors. After all, no investment goes up forever. Does that mean investors should avoid copper stocks?

Let Fundamentals Guide You
The major copper producers such as Southern Copper and Freeport-McMoran are joined by other copper miners whose business has been robust and whose stock prices have flourished. Rio Tinto (NYSE:RTP), Teck Resources (NYSE:TCK) as well as Ivanhoe Mines (NYSE:IVN) have all benefited from the copper resurgence. BHP Billiton (NYSE:BHP) is one stock in the group that is already showing the strains of its price run up, according to the warnings of technical analysis. Should fundamental investors pay attention to this? Yes, as it's another way of indicating its stock price is or has been getting out of whack compared with its fundamentals, its underlying earnings.

Let's explain. In the case of Southern Copper, the stock trades at a PE ratio of 28 right now. Yet if you gauge its earnings projections, $2.07 per share this year, $2.67 per share next year, these would have the stock selling at multiples of 14.8 and 11.5 respectively. These indicate a much more favorable buying price when the earnings catch up. Or, if you are even more cautious and are not sold on the earnings projections, you can wait for the stock price to retreat. Either way is prudent. Just don't buy now.

The Bottom Line
There is an opposing view to the technical analysis which suggests the price of copper will remain high, as demand is expected to still be robust this year. If, again, that view seems too risky, simply wait for this commodity cycle to pop, retreat, then snap up shares of Southern Copper or any of the other miners at much more favorable prices. After all, Southern Copper stock enjoyed a run from under $8 in 2005 to more than $40 by mid 2007 - the most recent copper cycle. Whether you buy commodity stocks for the longer term and hold them through the up-and-down cycles or trade them along the way, it's always wise to be patient, buy low then sell high or even hold on for several cycles and sell them for much higher. (For more, see How To Invest In Commodities.)

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