Seasonal Sector Trades: Copper’s Run Likely to Continue
By: Christopher Mistal & Jeffrey A. Hirsch
December 10, 2020
For the most part, this December has unfolded in rather typical seasonal fashion. The market started the month off with solid gains and continued to rally through the fourth trading day before turning somewhat mixed. Russell 2000 and NASDAQ advanced an additional two trading days while DJIA, S&P 500 and Russell 1000 see-sawed essentially sideways until yesterday, the seventh trading day of December.
[Typical December Seasonal Pattern Chart 1999-2019]
Currently the major indexes are navigating the often-dull period that has historically begun around the fourth trading day of the month through the eighth. Afterwards, later this week into early next week, another patch of weakness is possible. Then right around mid-month, the rally that began in at the beginning of November, is likely to resume. The resumption could be bumpy but once quarterly options expiration passes our Santa Claus Rally will begin on the open of trading on December 24. Since 1969, S&P 500 has enjoyed an average gain of 1.3% during the Santa Claus Rally that spans the last five trading days of this year and the first two trading days of next year.
Copper’s Bullish Seasonality 
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 14 and hold until about February 24. In this trade’s 48-year history, it has worked 31 times for a success rate of 64.6%. After four straight years of declines from 2012 to 2015, this trade was successful three years in a row with increasing theoretical gains. Last year the trade was a bust as Covid-19 emerged in China and eventually spread to be a global pandemic.
Cumulative profit, based upon trading a single futures contract excluding commissions and fees, is a respectable $74,025. Just over 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 cancelled by Covid-19 triggered shutdowns. But, there is light at the end of the Covid-19 pandemic tunnel now that vaccines are becoming available and copper’s rally since its late-March bottom has accelerated in recent weeks. An accommodative Fed, with near zero rates, and the strong possibility of another Federal stimulus bill are also likely to lift copper prices which in turn could boost the shares of the companies that explore, mine and bring copper to market.
[Copper (HG) Bars and Seasonal Pattern Chart (Weekly Data December 2019 – December 10, 2020)]
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 has picked up when copper does 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 plus interest income from CPER’s holdings less fund expenses. 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, but at or near overbought levels. A position in CPER can be considered on dips below $21.00. If purchased an initial stop loss of $18.50 is suggested. Should CPER not dip below its below limit, CPER could also be considered on a breakout above $22.30 (projected monthly resistance, red dashed line in chart below). 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 9, 2020 are: Vedanta LTD, First Quantum, KGHM Polska Miedz SA, Glencore and Antofagasta. COPX could be considered on dips below $28.00. If purchased, an initial stop loss of $23.75 is suggested. Should COPX not dip below its below limit, COPX could also be considered on a breakout above $29.00 (just above projected monthly resistance, red dashed line in chart below). This trade will also be tracked in the Sector Rotation section of the ETF Portfolio.
[Global X Copper Miners ETF (COPX) Daily Bar Chart]