Seasonal Sector Trades: Copper’s Rally Not Over Yet
By: Christopher Mistal & Jeffrey A. Hirsch
December 06, 2016
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 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.
[Long Copper (May) Trade History Table]
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. Ahead of Election Day, copper was already beginning to make a move and once Trump was declared the winner, it rocketed higher on potentially higher domestic growth and infrastructure spending. But, even at current levels, copper is still well off its highs from 2011 near $4.50 a pound. The move higher could continue especially if Trump is successful in his first 100 days in office. 
[Copper (HG) Bars and Seasonal Pattern Chart (Weekly Data December 2015 – December 6, 2016)]
One 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 Index, which represents the potential return of an unleveraged investment in copper futures. JJC trading volume is on the light side, trading around 70,000 shares per day on average over the past three months, but it does pick up when copper moves. JJC could be considered on dips below $30.00. Once purchased a stop loss of $27.50 is suggested. This trade will be tracked in the Almanac Investor ETF Portfolio.
[iPath Bloomberg Copper TR Sub-Index ETN (JJC) Daily Bar Chart]
Another way to gain exposure to copper and its seasonally strong period is through the companies that mine and produce copper. Global X Copper Miners ETF (COPX) holds shares of some of the largest copper miners and producers from across the globe. Its top five holdings as of December 5, 2016 are: Hudbay Minerals, Freeport-McMoRan, KAZ Minerals, Vedanta Resources and Antofagasta. COPX could be considered on dips below $21.50. If purchased, an initial stop loss of $19.40 is suggested. This trade will also be tracked in the ETF Portfolio.
[Global X Copper Miners ETF (COPX) Daily Bar Chart]