Seasonal Sector Trades: Looking for Corn & Copper to Overcome Commodity Stigma

By: Christopher Mistal & Jeffrey A. Hirsch

December 09, 2014

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 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 12 and hold until about February 23. In this trade’s 42-year history, it has worked 28 times for a success rate of 66.7%. This trade has produced gains in ten of the last thirteen years. Losses were in 2006 (end of housing bubble), 2012 (copper peaked in February) and 2013 (peaked in late December as emerging market growth slowed).

Cumulative profit, based upon a single futures contract excluding commissions and fees, is a solid $78,025. Nearly 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.

Let’s consider a stock that mirrors the price moves of copper. The chart below has Global Brass and Copper Holdings (BRSS) prices overlaid on copper. This company primarily operates in the U.S. as a converter, fabricator and processor of copper and brass products. BRSS is not a mining company; they are essentially a recycler that produces sheet, strip, foil, rod, tube and similar products from processed scrap, used copper cathodes and other refined metal sources. Although based in the U.S., BRSS also has some operations in China, Japan, United Kingdom and Germany.

[Copper (HG) Bars, Global Brass and Copper Holdings (BRSS) Closes and Seasonal Pattern Chart (Weekly Data November 2013 – December 9, 2014)]

Year-to-date, BRSS has had a difficult year, down roughly 25% as of today’s trading. Revenues are down with the price of copper, but BRSS remains profitable and is paying a dividend. Should typical seasonal strength in copper materialize, BRSS is highly likely to climb higher with copper. Although BRSS’s technical picture is improving with a recent MACD buy confirmation signal and improving relative strength, it could still be susceptible to further tax-loss selling pressure before yearend. BRSS could be bought on dips below $12.33. If purchased, a stop loss of $10.05 is suggested. This trade will be tracked in the Almanac Investor Small-Cap Stock Portfolio.

[Global Brass and Copper Holdings (BRSS) Daily Bar Chart]

Yet another option to take advantage of copper’s seasonal move is iPath DJ-UBS Copper TR Sub-Index ETN (JJC). As a reminder, ETNs differ from ETFs. An ETN is debt whose current value is based upon an index return. In the case of JJC, it is linked to the Dow Jones-UBS Copper Total Return Sub-Index which represents the potential return of an unleveraged investment in copper futures. JJC trading volume is on the light side, trading a little more than 20,000 shares per day on average over the past three months, but it does pick up when copper moves. JJC could be bought on dips below $34.75. Once purchased a stop loss of $32.50 is suggested. This trade will be tracked in the Almanac Investor ETF Portfolio.

[iPath DJ-UBS Copper TR Sub-Index ETN (JJC) Daily Bar Chart]

Corn Bounces on Seasonal Cue

In the United States and many other parts of the world, one would find life without corn difficult, as it has an extremely diverse range of uses. Corn is used as a basic food staple, to manufacture plastic, and for nearly everything in between. Most recently, growing demand from ethanol production and animal feed has resulted in a tightening of supply and the increasing concern of potential shortages.

Weather plays a significant role in corn production. Excess rain or cold weather can delay planting, and once the corn is in the ground, drought can be a threat to the harvest. The crop is most vulnerable to weather conditions in June and July in North America. Prices tend to make seasonal lows in the fall at harvest, when there is an abundance of supply, and then begin to rise steadily until spring planting begins.

[Corn (C) Bars and Seasonal Pattern Chart (Weekly Data Nov 2013 – December 9, 2014)]

Our best percentage trade suggests buying corn’s July futures contract in the first half of July and holding until mid-January. Since 1970, this trade has been successful 28 times in 44 years, 63.6% and from 2003 to 2011 this trade racked up nine consecutive gains. In 2012, summer drought sent corn soaring in June and July. When the crop came in better than expected in the fall, there was only one way for price to go, down. Last year, the trade would have been successful if the long position was maintained in early spring. This year, corn bounced off multi-year lows touched in early October and has been rallying since.

Outside of the futures market, Teucrium Corn (CORN) is a “pure” ETF to trade the commodity corn. CORN has over $100 million in assets consisting of CBOT corn futures contracts. CORN holds the second-to-expire, third-to-expire and the December contract following the third-to-expire contract. This strategy attempts to reduce the negative effects of backwardation and contango. CORN can be bought on dips below $25.75. If purchased, set a stop loss at $23.75. This trade will also be tracked in the Almanac Investor ETF Portfolio.