#$copx

“Copper has a tendency to make a major seasonal bottom in December and then a tendency to post major seasonal peaks in April or May.” That’s how we led off our December 13, 2018 post Copper Poised For Seasonal Rally. At the time in our digital newsletter we gave our subscribers several actionable trade ideas in our weekly alert Seasonal Sector Trades: Copper Setting Up For a Rally.

We suggested futures traders could go long a May futures contract on or about December 17 and hold until about February 24. From December 17 to February 25 the May copper contract gained about 7% or $4775 per contract not including taxes, fees and commissions.

In addition to the futures trade ideas we recommended two ETFs and two highly correlated stocks: United States Copper (CPER) at 17.00, Global X Copper Miners ETF (COPX) at 19.00, Freeport-McMoRan (FCX) at 10.95 and Southern Copper (SCCO) at 32.00. You can check out the whole initial write-up and our latest portfolio updates to see our original and current buy limits and stop losses.

As of today’s close CPER is at 18.41, up 8.29%; COPX is at 22.63, up 19.11%; FCX is at 13.16, up 20.18%; and SCCO is at 40.42, up 26.31%.

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Copper has a myriad of industrial uses making it a vital element of the modern day economy. Because of this fact it is often been thought of as a leading indicator for economic activity and for stock markets. Copper’s recent surge back to around 3$ per pound has caught the attention of many, but is this surge being correctly interpreted?

As a leading indicator, copper’s recent surge would seem to suggest strength or at the very least anticipated economic strength which could in turn result in higher stock prices. This may or may not be the full picture. Some of copper’s recent move could also be due to forecast supply shortages this year and next. Some of this surge could be in anticipation of massive U.S. infrastructure spending. And in the next chart, U.S. dollar weakness is also likely giving copper a boost. Year-to-date, the U.S. dollar index is down 8.7% compared to a 19.3% gain by copper.

Copper has a tendency to make a major seasonal bottom in December and then a tendency to post major seasonal peaks in April or May (shaded in yellow in chart below). This pattern could be due to the buildup of inventories by miners and manufacturers as the building construction season begins in late-winter to early-spring. Auto makers are also preparing for the new car model year that often begins in mid- to late-summer. Traders can look to go long a May futures contract on or about December 14 and hold until about February 23. In this trade’s 44-year history, it has worked 28 times for a success rate of 63.6%. This trade produced gains in ten of eleven years from 2001 to 2011, but has been down four years straight. Last year’s loss could have been avoided with a few more days of holding the long position into early March when copper briskly rebounded.

Cumulative profit, based upon a single futures contract excluding commissions and fees, is a respectable $68,988. Better than one-fourth of that profit came in 2007, as the cyclical boom in the commodity market magnified that year’s seasonal price move. However, this trade has produced other big gains per single contract, such as a $14,475 gain in 2011, and even back in 1973, it registered another substantial $9,475 gain. These numbers show this trade can produce big wins and big losses if not properly managed. A basic trailing stop loss could have mitigated many of the losses.

Copper prices have been red-hot, but the rally may encounter some challenges here.

Of the myriad of markets to scream higher in the week since the presidential election, one of the more high profile rallies has been that of copper. In fact, like most of the industrial metal complex, copper actually started moving a couple weeks prior to the election. So, as happens so often, the industrial metals (i.e., those folks buying them) seemed to discount the improbable election of Donald Trump well ahead of time.

Then again, perhaps the rally had nothing to do with the election. Either way, it does not matter to us. All that matters is what is happening. And what is happening right now is a potentially stiff challenge to the immediate continuation of the copper rally. We make this suggestion for a couple reasons.

First of all, there is price. Using the S&P GSCI Cooper Index (currently at 394), the price of copper is presently testing the following potential resistance levels:

Post-2011 Down Trendline (on a log scale) ~397

23.6% Fibonacci Retracement of 2011-2016 Decline ~404

61.8% Fibonacci Retracement of Decline from Dec 2014 Breakdown Pt/May 2015 Peak to Jan 2016 Low ~400

Interestingly, the past 3 days saw the Copper Index break above these resistance levels -- Friday, by 7.5% -- before closing back at or below them. Thus, this area has seemingly been validated now as legitimate resistance.

It’s not only price, however. Looking at trader positioning in copper futures, we see another potential reason for concern. That’s because this past week saw Commercial Hedgers increase their net short position by over 31,000 contracts, the largest increase on record, going back to 1989. Furthermore, their current net short position of roughly 38,000 is their largest net short position since 2005.

Why is this significant? Commercial Hedgers are deemed the “smart money”. Again, this is not because they are always right. They take positions opposite trend-following Speculators, e.g., commodity funds, hedge funds, etc. Thus, during long trends, they can be wrong for some time. However, at important junctures and turning points, they are almost always correctly positioned. That’s one of the benefits of tracking this data published in the CFTC’s Commitment Of Traders report.

And given the Hedgers’ largest net short position in 11 years, it could be a considerable headwind, especially if copper prices begin to sell off. Now, if prices break right through the aforementioned resistance, the unwind in futures positions will not yet be triggered. Thus, the Hedgers’ net short will perhaps continue to get more and more extreme.

The current set of circumstances do warrant caution in this red-hot commodity, however, in our view. And as an FYI, we have posted 2 similar setups in recent weeks involving natural gas and coffee. Nat gas prices greeted our post by dropping more than 25% in the past few weeks. And coffee too has started to come in a bit after our post from a week ago.

So while copper prices have gone through the roof in recent weeks, recent evidence from similar setups across the commodity space would seem to suggest a bit of caution here.

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More from Dana Lyons, JLFMI and My401kPro.

Last week’s election results triggered numerous notable market events. The U.S. dollar surged to multi-month highs and is on the verge of breaking out to multi-year highs, 10- and 30-year Treasury bond yields surged as prices slumped, DJIA broke out to new all-time record highs and copper surged 10.77% last week. Today we look at the historical significance, if any, of copper’s sudden move higher.

In the following table, the 15 previous weekly gains by copper in excess of 10% appear. We used continuously-linked, non-adjusted, front month futures contract prices since August 22, 1972 for all copper data. These past 15 weekly surges were followed by S&P 500 losses averaging 3.58% during the month following the weekly copper surge. At 3 months after the weekly copper surge, S&P 500 was still down on average 0.48% however, by 6 months after S&P 500 had turned the corner and by 1 year later S&P 500 was up 13.8% on average with just a single loss.

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Copper has a tendency to make a major seasonal bottom in December and then a tendency to post major seasonal peaks in April or May (shaded in yellow below). This pattern could be due to the buildup of inventories by miners and manufacturers as the building construction season begins in late-winter to early-spring. Auto makers are also preparing for the new car model year that often begins in mid- to late-summer. Traders can look to go long a May futures contract on or about December 14 and hold until about February 23. In this trade’s 43-year history, it has worked 28 times for a success rate of 65.1%. This trade has produced gains in ten of the last fourteen years. Losses were in 2006 (end of housing bubble), 2012 (copper peaked in February), 2013 (peaked in late December as emerging market growth slowed) and 2014 (bottomed in January 2015).

Cumulative profit, based upon a single futures contract excluding commissions and fees, is a respectable $69,400. Slightly more than one-fourth of that profit came from 2007, as the cyclical boom in the commodity market magnified that seasonal price move. However, this trade has produced other big gains per single contract, such as a $14,475 gain in 2011, and even back in 1973, it registered another substantial $9,475 gain. These numbers show this trade can produce big wins and big losses if not properly managed. A basic trailing stop loss could have mitigated many of the losses.