Seasonal Sector Trades: Copper Poised to Commence Seasonal Run Early By: Christopher Mistal & Jeffrey A. Hirsch | November 11, 2021 | Email | Print

Next week is not only November’s monthly option expiration week, but it is also the last full week of trading before Thanksgiving. DJIA has a reasonably solid track record over the last 28 years, rising 19 times the week before Thanksgiving with a median gain of 0.41%. But the other major U.S. stock market benchmarks have not been as strong and there has been more weakness across the board recently. Since 2003 DJIA is up only 9 out of the last 18 years with a median loss of 0.09%.

 

S&P is up 16 of the last 28 years with a median gain of 0.24% and down 10 of the last 18, –0.16% median loss. NASDAQ is up 16 of the last 28 years with a median gain of 0.28% and down 9 of the last 18, +0.07% median gain. Russell 2000 is up 15 of the last 28 years with a median gain of 0.54% and down 10 of the last 18, –0.20% median loss. If weakness does manifest next week, it maybe a good set up for the Thanksgiving trade of buying into weakness the week before Thanksgiving and selling into strength around the holiday and typical November end-of-month strength.

 

 

 

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 49-year history, it has worked 32 times for a success rate of 65.3%. After four straight years of declines from 2012 to 2015, this trade was successful three years in a row with increasing theoretical gains. In 2020 the trade was a bust as Covid-19 emerged in China and spread worldwide.

 

Cumulative profit, based upon trading a single futures contract excluding commissions and fees, is a respectable $90,375. Just over one-fifth 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 last year’s $16,350 gain, and even back in 2011, it registered another substantial $14,475 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.

 

 

In the following chart, the front-month copper futures weekly price moves and seasonal pattern are plotted. Typical seasonal strength in copper is depicted by a blue arrow in the lower pane of the chart. Last year’s seasonal period is visible in the top pane of the chart accompanied by another blue arrow. Since copper’s May peak, it has been trading modestly lower in a sideways trend. This sideways trend is likely to be snapped by a breakout to the upside. Massive infrastructure spending is expected to be signed soon. The $1 trillion spending package is highly likely to be bullish for copper and its numerous uses.

 

 

One 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 less fund expenses. CPER’s daily volume can be on the light side, but it does appear to be sufficiently liquid with average daily volume approaching 300,000 shares. Stochastic, relative strength and MACD technical indicators applied to CPER are all beginning to improve. A position in CPER can be considered at current levels up to a buy limit of $27.20. If purchased an initial stop loss of $24.90 is suggested. This trade will be tracked in the Almanac Investor Sector Rotation ETF Portfolio. For tracking purposes, CPER will be added to the portfolio using its average daily price on November 12.

 

 

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 November 10, 2021 are: Sumitomo Metal Mining, Lundin Mining, OZ Minerals, Freeport-McMoRan and Zijin Mining. COPX could be considered near current levels up to a buy limit of $37.70. If purchased, an initial stop loss of $33.85 is suggested. This trade will also be tracked in the Sector Rotation section of the ETF Portfolio. For tracking purposes, COPX will be added to the portfolio using its average daily price on November 12.