Seasonal Sector Trades: Copper Strength Begins Early
By: Christopher Mistal & Jeffrey A. Hirsch
December 12, 2019
Copper has a tendency to make a major seasonal bottom in November/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 13 and hold until about February 24. In this trade’s 47-year history, it has worked 31 times for a success rate of 66.0%. After four straight years of declines from 2012 to 2015, this trade has been successful the last three years with increasing potential gains.
Cumulative profit, based upon a single futures contract excluding commissions and fees, is a respectable $79,513. About 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 historical 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 in the lower pane of the chart. Last year’s seasonal period was essentially text-book perfect. Copper did make a lower low in early-January 2019 compared to December’s low and it rallied to highs in April. Unlike last year, copper appears to have already begun its seasonal rally after bottoming in late-August/early September. A trade deal with China, even a modest improvement such as a Phase 1 deal, could boost confidence and produce a corresponding bump in economic growth. Recent rate cuts by the Fed have translated into lower mortgage rates which could also eventually lead to a better housing market outlook and a corresponding rise in copper.
[Copper (HG) Bars and Seasonal Pattern Chart (Weekly Data December 2018 – December 12, 2019)]
One option to take advantage of copper’s seasonal move is iPath Series B Bloomberg Copper Sub-Index TR ETN (JJC). As a reminder, ETNs differ from ETFs. An ETN is debt whose current value is based upon the returns of the index it was designed to track. In the case of JJC, it is linked to the Bloomberg Copper Sub-Index Total Return, which represents the potential return of an unleveraged investment in one or more relevant futures contracts plus the rate of interest that could be earned on cash invested in specific Treasury bills. JJC 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 JJC.
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 it does appear to be more liquid that JJC. Stochastic, relative strength and MACD technical indicators applied to CPER are all positive now. A position in CPER can be considered on dips below $17.50. If purchased an initial stop loss of $16.45 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 December 12, 2018 are: Freeport-McMoRan, First Quantum, Southern Copper, Kaz Minerals and Zijin Mining. COPX could be considered on dips below $19.55. If purchased, an initial stop loss of $17.85 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. One common name that fits nicely is Southern Copper (SCCO). It is highly correlated with the price of copper, pays a dividend and has a reasonable valuation. SCCO could be considered on dips below $40.20. If purchased an initial stop loss at $36.75 is suggested. This stock trade will be tracked in the Almanac Investor Stock Portfolio.
[Southern Copper (SCCO) Daily Bar Chart]