#$scco

[jeffhirsch]

Watch Out For Spring Copper Top

“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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[jeffhirsch]

Typical seasonal strength likely to keep copper rally alive and well

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.

[jeffhirsch]

Dr. Copper Prescribes Buying S&P 500 Dips

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.

Click here to view full-size…

Last week’s copper surge could be signaling the end of its bear market that began in 2011. If we believe Dr. Copper does have a PhD in economics and its performance is indicative of future economic activity, then last week’s big advance could be a signal to buy stocks on any dips in the near term. Past weekly surges were followed by S&P 500 volatility in the near-term, but within 1 year, the S&P 500 was higher 93.3% of the time.

[jeffhirsch]

Does Dr. Copper’s top portend recession and bear market?

John LaForge (@Phomax) who leads Ned Davis Research's (@NDR_Research) commodity team posted this cool chart showing how big selloffs in copper prices have always been associated with recessions. Since Copper’s Top in February 2011 the orange metal is now down 50% at today’s close.

Legend says that “Dr. Copper” has a PhD in economics as it is a major construction material and indicative of economic activity. Then there’s the old saying that every bull market has a copper top. And every recession in the U.S. has been associated with a bear market in stocks.

Syllogistically, if big copper selloffs like the one we are in now have always been associated with recession and recession is always associated with bear markets, a bear market is likely on the horizon. While I expect a bear market in stocks to begin at some point over the next year or two – perhaps much sooner, the timing is never exact and the correlation of the S&P 500 bear markets to copper bear markets is erratic.

I thought it would be instructive to examine the performance of the S&P 500 during the copper bull and bear markets presented by NDR above. In the table below the S&P 500’s performance is correlated to the big copper moves. From Copper’s high to low the S&P is up on average with a modest loss in the 1980s and a big decline 2008-2009. But the S&P’s gain during the copper bull markets is nearly twice what it is during the copper bears.

However, the stock market is susceptible to bear markets during extended copper selloffs. During the 1980-1982 copper bear, S&P was down 27.1% from November 28, 1980 to August 12, 1982. While copper floundered in the mid-1980s S&P was slashed 33.5% in the ’87 Crash. The copper downdraft from 1995-2001 was accompanied by two nasty bears with the S&P down 36.8% from March 2000 to September 2001 and off 33.8% from January 2002 to October 2002.

The lingering effects of the unprecedented quantitative easing programs by the Fed since 2008 and the zero-rate policy is likely staving off a stock market selloff, correction or bear market. But perhaps Dr. Copper is telling us that when the Fed pulls the plug on this QE/Zero-rate life-support system we will get our bear market comeuppance.