Seasonal Sector Trades: Copper Setting Up For a Rally
By: Jeffrey A. Hirsch & Christopher Mistal
December 13, 2018
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.
Cumulative profit, based upon a single futures contract excluding commissions and fees, is a respectable $74,913. 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.
[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. 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. 
[Copper (HG) Bars and Seasonal Pattern Chart (Weekly Data December 2017 – December 13, 2018)]
One option to take advantage of copper’s seasonal move is iPath Bloomberg Copper TR Sub-Index ETN (JJCTF). As a reminder, ETNs differ from ETFs. An ETN is debt whose current value is based upon an index return. In the case of JJCTF, it is linked to the Bloomberg Copper Total Return Index, which represents the potential return of an unleveraged investment in copper futures. JJCTF trading volume is quite thin, trading just a few thousand shares per day on average. Volume does pick up when copper begins to move, but we will pass on JJCTR.
A second option that provides exposure to the copper futures market without having to have a futures trading account, is United States Copper (CPER). This ETF tracks the daily performance of the SummerHaven Dynamic Copper Index Total Return. CPER’s daily volume is also on the light side, but at least it frequently trades in excess of 10,000 shares per day. Stochastic, relative strength and MACD technical indicators applied to CPER are all negative now. A position in CPER can be considered on dips below $17.00. If purchased an initial stop loss of $16.25 is suggested. This trade will be tracked in the Almanac Investor Sector Rotation ETF Portfolio.
[United States Copper (CPER) 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 December12, 2018 are: Kaz Mineral, Vedanta, KGHM Polska, Zijin Mining Group and OZ Minerals. COPX could be considered on dips below $19.00. If purchased, an initial stop loss of $20.47 is suggested. This trade will also be tracked in the Sector Rotation section of the ETF Portfolio.
[Global X Copper Miners ETF (COPX) Daily Bar Chart]
Yet another option to trade seasonal strength in copper is through the use of highly correlated stocks. Two common names that fit nicely are Freeport-McMoRan (FCX) and Southern Copper (SCCO). Both are highly correlated with the price of copper and both are well below their respective highs traded earlier this year. Both pay a dividend and have attractive valuations relative to the broader market. SCCO could be considered on dips below $32.00. If purchased an initial stop loss at $27.84. FCX can be considered on dips below $10.95. If purchased a stop loss of $9.53 is suggested. These two stock trades will be tracked in the Almanac Investor Stock Portfolio.
[Freeport-McMoRan (FCX) Daily Bar Chart]
[Southern Copper (SCCO) Daily Bar Chart]