Seasonal Sector Trades: Copper Setting Up For a Rally By: Christopher Mistal & Jeffrey A. Hirsch | December 07, 2017 | Email | Print

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 45-year history, it has worked 29 times for a success rate of 64.4%. After four straight years of declines, this trade returned to success this year.

 

Cumulative profit, based upon a single futures contract excluding commissions and fees, is a respectable $71,213. More 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.

 

 

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. Last year’s sizable move immediately following Election Day is evident. Copper also rallied strongly from late-July until mid-October, but has weakened recently potentially setting this trade up nicely. Even at current levels, copper is still well off its highs from 2011 near $4.50 a pound. 

 

 

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 35,000 shares per day on average, but it does pick up when copper moves. JJC could be considered on dips below $33.50. Once purchased a stop loss of $30.95 is suggested. This trade will be tracked in the Almanac Investor ETF Portfolio.

 

 

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 6, 2017 are: Teck Resources, Southern Copper, Freeport-McMoRan, First Quantum and Grupo Mexico. COPX could be considered on dips below $23.50. If purchased, an initial stop loss of $22.25 is suggested. This trade will also be tracked in the ETF Portfolio.