Seasonal Sector Trades: Copper Building a Bullish Foundation
By: By Christopher Mistal & Jeffrey A. Hirsch
December 03, 2015
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 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.
[Long Copper (May) Trade History Table]
Let’s consider a stock that mirrors the price moves of copper. The chart below has Southern Copper (SCCO) prices (solid black line) overlaid on copper. This company mines, explores, smelts and refines copper and other minerals primarily in South America. SCCO revenues and earnings have fallen alongside the price of copper and other metals, but it has managed to remain profitable and maintain a small dividend. 
[Copper (HG) Bars, Southern Copper (SCCO) Closes and Seasonal Pattern Chart (Weekly Data November 2014 – December 3, 2015)]
Since peaking in May, copper and SCCO are both down substantially. Copper has fallen by roughly a third while SCCO is off nearly 25% over the past six months. Tepid global growth and a strong U.S. dollar are two of the biggest drivers behind this year’s dive in copper prices. There are a few signs suggesting global growth could accelerate namely substantial stimulus in Europe and Japan. And the dollar index (USDX) looks like it has topped out again. Currently down nearly 3% following today’s ECB announcement. While copper appears to be forming a base just above $2, a key psychological support level. All of this improves the likelihood of another seasonal rally by copper and potentially by the companies that mine it. SCCO could be bought on dips below $25.00. If purchased, a stop loss of $21.75 is suggested. This trade will be tracked in the Almanac Investor Large-Cap Stock Portfolio.
[Southern Copper (SCCO) Daily Bar Chart]
Yet another option to take advantage of copper’s seasonal move is iPath Bloomberg 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 Bloomberg 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 just 17,000 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 $23.45. Once purchased a stop loss of $21.15 is suggested. This trade will be tracked in the Almanac Investor ETF Portfolio.
[iPath Bloomberg Copper TR Sub-Index ETN (JJC) Daily Bar Chart]