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[jeffhirsch]

Copper’s Rally Gaining Momentum as Historically Bullish Season Arrives

Copper tends to make a major seasonal bottom in November/December and then tends to post major seasonal peaks in April or May. This pattern may be due to the buildup of inventories by miners and manufacturers in anticipation of the construction season that usually 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 13 and hold until about February 24.

In this trade’s 52-year history, it has worked 34 times for a success rate of 65.4%. The average gain in all years is 5.4%. After four straight years of declines from 2012 to 2015, this trade has been successful in six of the last eight years with solid theoretical gains. Last year, copper was essentially flat from mid-December until mid-March before ripping higher through mid-May. Strictly following the suggested hold period did result in a minor loss, while holding positions longer (which was done in the Sector Rotation ETF Portfolio last year) resulted in well above average gains.

In the accompanying chart, the front-month copper futures weekly price moves (top pane), and seasonal pattern (bottom pane) are plotted. Typical seasonal strength in copper is depicted by a blue arrow and yellow shading in the lower pane of the chart. Last year’s seasonal period is visible in the top pane of the chart. Since copper’s mid-May peak, its trend has generally been lower with a brief surge in September. Copper’s August low appears to have been retested in November and now appears to be beginning a new trend higher. This new positive trend does align well with copper’s typical seasonal pattern.

[jeffhirsch]

Copper’s Rally Likely to Continue as Historically Bullish Season Begins

Copper has a tendency to make a major seasonal bottom in November/December and then a tendency to post major seasonal peaks in April or May. This pattern could be due to the buildup of inventories by miners and manufacturers as the 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 24. In this trade’s 48-year history, it has worked 31 times for a success rate of 64.6%. After four straight years of declines from 2012 to 2015, this trade was successful three years in a row with increasing theoretical gains. Last year the trade was a bust as Covid-19 emerged in China and eventually spread to be a global pandemic.

In the following chart, the front-month copper futures weekly price moves and seasonal pattern are plotted. Typical seasonal strength in copper is highlighted in yellow in the lower pane of the chart. Last year’s seasonal period was cancelled by Covid-19 triggered shutdowns. But there is light at the end of the Covid-19 pandemic tunnel now that vaccines are becoming available and copper’s rally since its late-March bottom has accelerated in recent weeks. An accommodative Fed, with near zero rates, and the strong possibility of another Federal stimulus bill are also likely to lift copper prices which in turn could boost the shares of the companies that explore, mine and bring copper to market.

[jeffhirsch]

Copper’s seasonal rally underway

Copper has a tendency to make a major seasonal bottom in November/December and then a tendency to post major seasonal peaks in April or May. This pattern could be due to the buildup of inventories by miners and manufacturers as the 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 13 and hold until about February 24. In this trade’s 47-year history, it has worked 31 times for a success rate of 66.0%. After four straight years of declines from 2012 to 2015, this trade has been successful the last three years with increasing potential gains.

In the chart below, the front-month copper futures weekly price moves and seasonal pattern are plotted. Typical seasonal strength in copper is highlighted in yellow in the lower pane of the chart. Last year’s seasonal period was essentially text-book perfect. Copper did make a lower low in early-January 2019 compared to December’s low and it rallied to highs in April. Unlike last year, copper appears to have already begun its seasonal rally after bottoming in late-August/early September. A trade deal with China, even a modest improvement such as a Phase 1 deal, could boost confidence and produce a corresponding bump in economic growth. Recent rate cuts by the Fed have translated into lower mortgage rates which could also eventually lead to a better housing market outlook and a corresponding rise in copper.

[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%.

Subscribe to our Digital Subscription service today and get all our latest trade ideas and a Free Stock Trader’s Almanac 2019!

[jeffhirsch]

Copper poised for seasonal rally

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. This pattern could be due to the buildup of inventories by miners and manufacturers as the 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 17 and hold until about February 24. In this trade’s 46-year history, it has worked 30 times for a success rate of 65.2%. After four straight years of declines from 2012 to 2015, this trade has been successful the last two years.

In the above chart, the front-month copper futures weekly price moves and seasonal pattern are plotted. Typical seasonal strength in copper is highlighted in yellow. Last year’s seasonal period was actually tepid. The move off of copper’s December low to its late-December high was greater than the gain over the entire holding period. Copper also spiked in mid-June before succumbing to typical seasonal weakness. Copper has been essentially range bound since late-September. A reduction in Chinese tariffs on imported autos (along with the potential easing of other tariffs) could be a catalyst for copper to begin its seasonal rally soon. Any improvement in the U.S. housing market will also likely support higher prices for copper.

[jeffhirsch]

Is Dr. Copper sending mixed signals?

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.

Lastly and potentially least optimistic is the possibility that copper could be forming the proverbial top that has frequently preceded other stock bull market tops. Although, we should not be overly concerned with this possibility until copper’s current rally actually begins to fizzle or actually breaks down.

[jlfmi]

Will Headwinds Put A Roof On Copper Rally?

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.

The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

[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.