Copper is an excellent guage of animal spirits. It was one of the biggest winners of 2009 ($1.30 to $3.50) and one of the biggest losers since January (it fell to 2.80). Note that overnight it has broken out of and successfully tested the line containing its downtrend:
Interactive Brokers
Copper has been charting very well for the last month, almost spookily so.
1-month view:
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And the last week… we’ll see if it respects its channel and breaks that little rising wedge:
Source: Interactive Brokers
Here are the last 20 trading days of the Dow in a 60-min chart.
Source: prophet.net
Note the upward divergence in the bottom RSI, indicating that each downward movement since the 22nd has been weaker than the last. This can be an indication that the urgency to sell is waning. Perhaps it is all part of a corrective pattern within a downtrend that has set us up for another fast plunge, but it would also be expected if were about to rally strongly and correct the whole drop from 10,700.
At any rate, as of Friday’s close we were oversold and due for at least a minor rally. I had loosened my hedges earlier Friday, but I tightened them after the close and more on Sunday evening.
Here is the VIX, in a 60-day, 60-min chart. I think last week’s oscillation pattern could be somewhat troubling for the bulls, as it looks corrective:
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It reminds me that during the breakdown in spring 1930 there were no major countertrend rallies until the Dow had taken a swan dive, culminating in large gap-down day. Maybe this week brings such a move to thoroughly shatter the bulls’ complacency about this being a mere speedbump on the way to the 2007 highs.
Here’s summer ’29 to summer ’30:
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Here’s an update on copper, last trading at $3.05, off 50 cents from its highs. It has no business being anywhere near the 2007-2008 levels in this economy, as those levels were never sustainable anyway:
Source: stockcharts.com
It is still not oversold after this plunge, and I suspect that the retracement back towards the $1.50 area will be blindingly quick. I could put up a bunch more base metal charts that look just like this.
The best performing commodity of the past 12 months is probably sugar, which clocked a new 30-year high last week:
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I’m short, and I like the negative divergence in daily RSI, as well as the fairly clear wave count (5 of ’em, with a contracting triangle 4th wave this autumn indicating that this spike should mark the end).
Cocoa also set a 25 or 30 year high recently, and it’s historical pattern is similar to sugar’s. It’s another pet short of mine, and I like that the latest attempt at a new high has failed and that the uptrend is now broken:
Source: Futures.tradingcharts.com
Here’s the daily continuation chart of commodity index futures since July. Note the new highs on weakening momentum:
Source: futures.tradingcharts.com
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The oil and base metals markets are similar. Here’s the base metal index, from kitcometals.com:
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And oil futures, from stockcharts.com (3-year chart):
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See also:
Copper looks set to fall hard (12/21/09)
Let’s start with the Wall Street line, courtesy of Bloomberg this week:
Demand will be strong next year as consumption gains in China, the world’s biggest metal user, said Andrew Karsh, a co- manager of funds for the Credit Suisse Total Commodity Return Strategy team, which oversees about $4.4 billion.
“Industrial metals are a favorite of ours,” Karsh said yesterday in a telephone interview from New York. “There is real demand growing from emerging markets. Copper, lead, aluminum and other metals are required to increase infrastructure in places like China and India.”
This trader isn’t buying it, and as we’ll see below, China’s got more of the red metal than it knows what to do with.
Source: stockcharts.com
From kitcometals.com, here is a 5-year chart of copper warehouse stocks:
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Sure looks like someone took delivery of over a quarter million tonnes of London copper this spring and summer. Unfortunately for the bulls, it just went from warehouses on the Thames to warehouses on the Yangtse, and now it’s looking for a new home!
Chinadaily.com reports:
Copper stockpiles held in duty-free warehouses in China, the top user, may be re-exported after surging to as much as 350,000 tons from almost none at the start of the year, according to Xi’an Maike Metal International Group.
“We can hardly find buyers for refined copper,” said Luo Shengzhang, general manager of the copper department at Xi’an Maike. The company ranks among the country’s three biggest importers, according to the executive. “China’s got to export some copper from now and next year,” Luo said in an interview.
Copper, used to make pipes and wires, has more than doubled this year as China’s 4-trillion-yuan ($586 billion) stimulus spending, increased State stockpiling and lack of scrap material boosted China’s imports to a record. That’s helped to drive Chinese prices below London’s since at least July.
Xi’an Maike has had to re-route some bonded copper to London Metal Exchange warehouses in South Korea because the company was unable to find buyers in China, with local supply outpacing demand, said Luo. The effect of the stimulus package was wearing off and local scrap supply was improving, he said.
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And this from Mineweb.com:
Some of the more telling lines from a translated script of the CCTV (China’s national news channel) program (which I assume to be accurate) include:
- Wang Chao lived in Anxin county of Hebei province (rural area). He is in charge of a metal scrap collecting company. He used to purely take commissions for collecting scrap. Since 1H 2009, he started stocking scraps. He told CCTV his business now is like ‘gambling.’ Not only him, Mr. Wang said many people in his town have stocked a lot of metal at their home.
- They told CCTV they believe the metal prices will ‘certainly rise’, and they have ‘a lot of’ stocks. For example, he said, in Laohetou county, every household has dozens to hundred tonnes of copper. Nobody wants to sell. They believe copper price will goes back to Rmb70,000/tonne from currently Rmb40,000/tonne.
- Traders in Wenzhou city of Zhejiang province: A business man told CCTV, they use a lot of bank loans and bought a lot of metals for stocking. For one warehouse, he stocked at least 15 Kt to 20 Kt of copper. For his total personal metal inventories, he invested Rmb1-2 bn. He believe all metal prices will surge with inflation.
- A non-ferrous metal warehouse manager, Mr Qin Baoqing in Wusong District of Shanghai. He said many metals cannot be put in their warehouse, so they have to leave them in the backyard. Many stocks have not been moved for 3 months now. For example, he said, they have many aluminium stocks from Lanzhou Aluminium, Guizhou Aluminium, etc.
- He Jinbi from Maike (metal trading company). He told CCTV they saw many farmers in Guangdong province stocking more than 100 tonnes of aluminium at home. These people used to raise geese for living.
- Because the interest rate is too low in China. Many farmers could make hundreds of RMB profits per tonne, with dozens of Rmb per tonne cost of interests. They use their existing inventories to borrow more from banks. Banks are very ‘happy’ to lend to them.
Here’s a 1-month view of the Nymex December light sweet crude contact:
Source: Interactive Brokers
Watch for a break of that trendline. With bullishness running at 95% (and 97% on gasoline and heating oil), this rally must be getting long in the tooth. Also note that the rally has stalled against a longer-term channel trendline (see 1-year chart below). This week’s highs could make for a nice stop for a short position.
Source: Interactive Brokers
Don’t underestimate crude’s ability to levitate even if stocks begin to fall. This is just what happened in 2008 of course. Oil and other commodities charged ahead even as demand fell apart and deflation (a contraction of money + credit) took hold.
Also watch copper, which has been tracking oil pretty closely lately. Bullish readings aren’t as high here, so it may have even further to run:
Source: Interactive Brokers
The target here would be about $3.35-3.40 if copper hits the upper trendline. Given modest bullishness readings, there are enough traders to convert to the bull side for this to happen. Of course, a strong turn down in equities and move up in the dollar, should they come to pass, would be a headwind for all commodities.
We reached a point this week where almost all bears turned short-term bullish at the very least, if they didn’t swear off shorting altogether. Hordes of hobby bears were crushed over the last three weeks, and even hard core bears from before 2008 seemed to adjust their wave 2 targets upward as high as SPX 1200.
I took that as a sign of short-term weakness at the very least, so in addition to my regular purchase of December 2011 puts, I added a few March QQQQ puts and October 09 calls on the 10 year note. This AM I also took another stab at picking a top in copper at 2.60, with a 2.62 stop.
The reaction to GDP so far has been encouraging, with futures traders not buying the BS that the economy only shank at a 1% pace, since the surge in government spending gave it a phony boost. Since there is no P in government, why is government in GDP? GDP can go as high as the Feds want. All they have to do is spend and have the central bank monetize whatever bonds the market won’t absorb. This chicanery, plus inventory replacement, could bring a slightly positive number in Q3, ironically just as TTM S&P 500 earnings go negative for the first time since they started keeping records in 1936.
I see no reason to change my guess that the end of wave 2 is nigh. I have been thinking since spring that 1050 or September, whichever came first, would be the signal that the top was in. It could be in already, but don’t expect things to drop off a cliff right away. A wave of this magnitude rolls over slowly, with plenty of smaller breaks and rallies before the trend has solidly reversed.
Keep an eye on the credit markets. When fear comes back in earnest, corporate bond spreads will break their relentless slide downward, and short to intermediate term Treasuries, if not the 10-year and 30-year, will signal a renewed flight to safety.
Today’s action (equity and commodity sell-offs through key levels, major bond and dollar rallies) confirms once again that the dollar is still king and that deflation is the name of the game.
The action since March can be summed up as (1) a dead-cat bounce from oversold conditions in equities, (2) a replay of early 2008’s speculative rally in commodities, and (3) premature fears of the dollar’s demise.
The charts below show how things have played out since I noted the following on June 5:
Well, the reflation trade has managed to hold on for a few more days and even reached new heights, but the case for a pullback is looking that much better. Precious metals, non-dollar and non-yen currencies, oil and treasury yields have all benefited from what looks like a fairly extreme fear of inflation. …
From this juncture, I am still more enthusiastic about the prospects for the dollar, bonds and related commodity shorts than I am about stock market shorts, since the sentiment in the later has not reached the same levels of broad consensus. That said, it would be surprising if we don’t at least stop making new highs for a few weeks, if not fall well under 900 in the S&P.
This trade has gone well so far, but a bit over a week ago I had very large shorts (with futures) on the euro, pound, franc and oil, in addition to my large equity, copper and gold shorts, but the former made a little pop to new highs that stopped me out. I put on some more pound and franc shorts, and retained some puts on oil, but I’m kicking myself for being such a wimp with tight stop prices. My excuse for not re-shorting in bulk is that I was about to move for the summer and wouldn’t have much screen time again for a while.
I am also guilty of getting cute and taking profits on my silver futures short (from 15.75) at 13.92 and not re-shorting at 14.40 when I had the chance, though I have thought all along we are going well under $10. Nonetheless, today was a good day, and squiggles notwithstanding, I think we have turned the corner here.
Here are a few three-month charts from Yahoo! to show how things have gone so far (the little dots are placed on June 5 (actually I first said to fade the reflation trade on May 28):
S&P500:
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The dollar vs. the euro (not much action so far, but certainly no dollar flameout):
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USO (United States Oil Fund):
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Precious metals complex (GLD, SLV and GDX):
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30-year Treasury bond yield:
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Even grains have sold off hard (DBA agriculture fund):
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Now, we’ll see if this is just a setback from premature extremes or if we’re headed for new deflationary lows in a hurry. I think the reflation trade has topped, but that doesn’t mean equities can’t make a last ditch effort to stop out the shorts with new highs. That said, I’m sitting on a big load of index puts.
US equities, the VIX, oil and copper are bucking against price levels associated with multiple peaks and troughs over the last month. The levels are as follows:
July copper: resistance at $2.32 – 2.35
August oil: resistance at $70 – 71 (BTW, I have been stopped out here and am on the sidelines)
NASDAQ futures (NQ): resistance at 1470-1480
S&P 500 futures (ES): resistance at 915 – 925
VIX: support at 27
These markets are looking short-term toppy, but a push through here would be bullish. Every time the VIX has dropped to 27 it has snapped back up, oscillating around the 30 level for the past 5 weeks. Today’s action should go a long way towards relieving the oversold condition (OTM put spreads, low TICK) that we observed earlier this week).
Divergent action today
It is noteable that bonds are holding onto very nice gains and even pushing higher today, that the dollar is well off its lows, and that precious metals are languishing. We have an unresolved market here. I believe that the bond market is generally the most prescient, so unless treasuries get on board and sell off hard, I’m holding onto most of my reflation-trade shorts with relatively tight stops (with the exception of the CHF short — yesterday’s crash on manipulation news provided a nice exit — I’ll reenter if we get a bounce, as with GBP).
The markets are experiencing a bit of a thaw today, with the memory of panic several weeks behind us now. The VIX has just broken decisively below 40 for the first time since September. Treasury yields have broken out just a tad from their extreme lows. Oil has jumped back to the mid-40s, copper has relieved its oversold condition, the GDX gold stock ETF has more than doubled, and the Dow has crept back to near 9000 again.
The question now remains, how will fear return? In several more weeks or months after the mood turns from relief to greed (and fear of missing out), or in the very near future?
My mind is not made up, but any breakaway rally is way overdue. With every week since the November 21 lows, we have been relieving the oversold condition as a function of time rather than price. That is not to say that the Dow couldn’t creep all the way to 10,000 by March, but the longer we hover here, the less necessary such a rally becomes.
What would be interesting in a January plunge is for the bond market to sell off with the stock market for the first time in recent events. But if the inverse correlation still holds, the overbought condition in Treasuries could find relief in a “happy days are not quite here again but will be soon” rally in stocks. Today’s action is what such an environment would look like, but with a great deal more animal spirits — $65 oil might even materialize (before new lows of course).
At any event, with the VIX below 38 I picked up a few more cheap puts on GDX today. Gold stocks have had a great run, and the same people are buying them today as were holding them in the crash, and for the same reasons. That is a bad sign.
My favorite short though is still the death-defying Home Depot. Also keep an eye on WalMart. People need cheap stuff, but they don’t need as much of it as they have been buying in recent years. At 16.5, the PE on that behemoth is still out of line, as is Costco’s at 18.5.
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PS — Note that in this kind of analysis, I don’t pay much attention to news pieces or economic releases. That is not the way to trade. For instance, we have horrible manufacturing data out today, and all data is worse than 6 weeks ago, but the mood is hopeful and stocks are up, so how can you make money trading on the news?
I look at the mood of the market itself and try to figure out what it is feeling and what themes it is trading on: greed, panic, relief, inflation, deflation, dollar bad, dollar good, etc. I try to figure out the mood by what different asset prices are doing, and wait for entry and exit points when trends look exhaused. To know the larger trend is key, in this case deflation and depression, but the market’s take on the situation is always changing. You wait for Mr. Market to be very wrong about a situation or just too enthusiastic, as in the case of the overextended bond rally this month — in deflation, bonds are good, but overbought is overbought.
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