ETF Trades: Energy and Copper Setting Up By: Christopher Mistal | December 05, 2024 | Email | Print

For those who were unable to attend the member’s only webinar on Wednesday, the slides and video recording are available here (or copy and paste in a new browser window: https://www.stocktradersalmanac.com/LandingPages/webinar-archive.aspx). In addition to the seasonal pattern charts we have been tracking and presenting throughout the year, Jeff reviewed the numerous seasonal indicators and patterns that occur in December and carryover into January.

 

Shortly after first half December choppiness comes to an end, most likely around Friday the 13th, we will serve up the annual Free Lunch basket of stocks, page 116 of the Almanac, via email Issue before the market opens on December 23. Around the same time, we will be looking for early signs of small-cap outperformance, pages 112 and 114, followed by our Santa Claus Rally, the First Five Days of January and the full-month January Barometer. Based upon the outcome of these three indicators, we may adjust our outlook for the balance of Q1 and 2025. Until then, we remain bullish as this is the seasonal favorable period for stocks. Valuations are a concern, but economic data is holding up, the Fed is cutting interest rates, and the market continues to track seasonal trends and patterns rather closely.

 

Copper’s Bullish Seasonality 

 

Copper tends to make a major seasonal bottom in November/December and then tends 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 52-year history, it has worked 34 times for a success rate of 65.4%. The average gain in all years is 5.4%. After four straight years of declines from 2012 to 2015, this trade has been successful in six of the last eight years with solid theoretical gains. Last year, copper was essentially flat from mid-December until mid-March before ripping higher through mid-May. Strictly following the suggested hold period did result in a minor loss, while holding positions longer (which was done in the Sector Rotation ETF Portfolio last year) resulted in solid gains

 

Cumulative profit, based upon trading a single futures contract excluding commissions and fees, is a respectable $101,263. Slightly less than 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 notable big gains per single contract, such as the $16,350 gain from December 2020 to February 2021, and even back in 2011, it registered another substantial $14,475 gain. The worst loss occurred from December 2014 to 2015 when copper declined 11.8% generating a theoretical loss of $8,625. 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 (top pane), and seasonal pattern (bottom pane) are plotted. Typical seasonal strength in copper is depicted by a blue arrow and yellow shading in the lower pane of the chart. Last year’s seasonal period is visible in the top pane of the chart. Since copper’s mid-May peak, its trend has generally been lower with a brief surge in September. Copper’s August low appears to have been retested in November and now appears to be beginning a new trend higher. This new positive trend does align well with copper’s typical seasonal pattern. Another interest rate cut by the Fed later this month could boost copper further due to potentially lower interest rates for autos and houses spurring demand.

 

 

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 Copper Index Total Return less fund expenses. CPER’s daily volume can be on the light side, but it does appear to be adequately liquid with average daily volume jumping above 100,000 shares when copper does move. Stochastic, relative strength and MACD technical indicators applied to CPER are all positive and trending higher. 

 

A position in CPER can be considered on dips below a buy limit of $25.90. If purchased an initial stop loss of $23.63 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 should it trade below its buy limit.

 

 

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 4, 2024, are: First Quantum, Boliden AB, Ivanhoe Mines, Lundin Mining, and Antofagasta. COPX could be considered on dips below a buy limit of $42.05. If purchased, an initial stop loss of $38.37 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 when it trades below its buy limit.

 

 

 

Oil companies typically come into favor in mid-December and remain so until late April or early May in the following year (blue arrow and yellow shade in lower pane). This trade has averaged 11.55%, 10.29%, and 11.71% over the last 25-, 10-, and 5-year periods respectively. Seasonal strength in crude oil has also been ending sooner, typically in late April or early May instead of late June or July over the past ten years. As a reminder, this seasonality is not based upon the commodity itself (crude oil or natural gas); rather it is based upon NYSE ARCA Oil & Gas index (XOI). This price-weighted index is composed of major companies that explore and produce oil and gas.

 

 

SPDR Energy (XLE) is the top pick to trade this seasonal setup. A new position in XLE can be considered on dips with a buy limit of $91.75. Employ an initial stop loss of $83.72. Consider taking profits at the auto-sell price of $112.58. Exxon Mobil is the top holding in XLE at 21.37%. The remaining top five holdings of XLE are Chevron, ConocoPhillips, Williams Companies, and ONEOK. For tracking purposes, XLE will be added to the portfolio when it trades below its buy limit.

 

 

A second option that may perform well with the new incoming administration is SPDR S&P Oil & Gas Equipment & Services (XES). Domestic production and supplies of crude oil and natural gas are currently ample. Bringing additional supply to market would likely drive prices for the commodities lower, but it could also lead to an increase for oil & gas equipment and services. XES can be considered on dips below a buy limit of $82.65. If purchased, consider utilizing an initial stop loss at $75.42. For tracking purposes, XES will be added to the portfolio when it trades below its buy limit.

 

 

 

On seasonal cue, the Sector Rotation ETF portfolio has rebounded to an average gain of 5.2%. Our Seasonal MACD Buy Signal was early this year, but late-October market weakness provided ample opportunity to establish positions at better levels ahead of the market’s post-Election-Day surge. As of the close on December 4, the top performing holding was iShares Bitcoin Trust (IBIT), up 29.7%. Bitcoin did briefly break through $100,000 today but retreated off its highs. IBIT is on Hold.

 

iShares US Technology (IYW) and SPDR Consumer Discretionary (XLY) round out the top three positions in the portfolio up 15.1% and 14.8% respectively. IYW and XLY can still be considered on dips below their buy limits. Please note, if you already hold an existing position in the various ETFs in the Sector Rotation portfolio this is not a new recommendation. If you do not have a position, please consider utilizing existing and updated buy limits to establish positions during any first half December weakness.

 

Historical seasonal strength in gold and silver stocks usually ends in December. However, it appears to have ended just after Election Day this year. VanEck Gold Miners (GDX) and SPDR Gold (GLD) were both stopped out on November 11 when they closed below their stop losses. Proceeds from the sale of these positions may be better used in the new trade ideas above. 

 

Telecom’s seasonally favorable period has historically come to an end in late December (page 94 STA). iShares DJ US Telecom (IYZ) is on Hold. Semiconductors also end their favorable season in December. iShares Semiconductor (SOXX) is on Hold. IYZ is having an above average seasonal period, but SOXX has been floundering.

 

All other positions in the Sector Rotation portfolio can still be considered on dips below their respective buy limits or at current levels. Buy limits have been adjusted, where applicable, for recent gains in the table below.

 

 

 

The “Best Months” are here, the market has been rallying and we remain bullish as election year 2024 nears its end and on into 2025. This has been our stance since our Seasonal MACD Buy signal criteria was met in October and it has been paying off thus far with the Tactical Seasonal Switching portfolio gain climbing to 5.8% as of the close on December 4. The market is exhibiting some choppy trading here in the first half of December. This is expected and is suggested by December’s typical seasonal pattern. Based upon that pattern we are anticipating that once tax-loss selling abates, the market will likely resume its record setting run in the second half of December and likely into the New Year.

 

From now until second-half December strength materializes, “Best Months” positions, QQQ, IWM, DIA and SPY can still be considered near current levels up to their respective buy limits.