What Copper's Breakout Means

In the last two weeks, in Reflation Supported By Stocks, Commodities, and Oil, and Gold, Recessions, Bonds, and 1987, we hypothesized that recent bullish moves in gold, oil, and the CRB Index were evidence of successful "reflation" of asset prices via monetary and fiscal policy. This week, we can add copper and emerging markets to the bullish evidence list. From a fundamental perspective, the desire to hold copper is based on economic need (you want to make a product), and inflation protection (you want to own hard assets rather than paper currencies).

Copper and Emerging Markets Are Worth Monitoring

When markets move in an unexpected manner, we should pay attention. In recent weeks, many market observers had noted the following:

• Copper had failed to make a new high for over nine weeks.
• Many markets have a bearish formation known as a “rising wedge”.

Using these accurate observations, a case was made by some that the "rally has come too far too fast", and that copper was indicating a weak recovery. From where we sit, those were legitimate concerns, and warranted close monitoring, while giving the bull market the benefit of the doubt. If you are bearish, you would expect copper to fail to make a new high for the remainder of 2009, and for "rising wedge" formations to conclude with bearish outcomes. In the case of the Emerging Markets Index and copper, the exact opposite has happened:

• Copper experienced an upside breakout and made new highs (bullish).
• Emerging Markets recently broke out from a "rising wedge" formation (bullish).

"Dr. Copper" Says Don’t Be Too Quick To Sell

If the current global rally was about to end, would we expect copper to be making new highs? On Wall Street, copper is often referred to as "Dr. Copper, who holds a Ph.D. in economics" based on the metal’s ability to forecast future economic activity. Copper recently made both a new closing high and new intraday high. Copper is bullish – we need to take that into account during any correction.



Emerging Markets Shake Off Bearish Pattern

As mentioned above, many markets, including the S&P 500, currently have what is known as a "rising wedge" formation. A rising wedge is a bearish formation. However, in a bull market bearish outcomes do not always occur after bearish formations. Relative to the Emerging Markets Index, the S&P 500 is a laggard. While we are concerned about the S&P 500’s rising wedge, we need to keep in mind that the Emerging Markets have already broken out of their wedge formation. If the leaders continue to lead, and the laggards continue to follow, then it is possible that the S&P 500 will also see a bullish break from its rising wedge.

Click on chart to enlarge




No Time For Blind Bullishness

Should the breakouts in copper and emerging markets fail to hold, it would be wise for the bulls to pay attention. However, the longer these markets remain in a breakout state, the more bullish these events become. As stated above, when markets move in an unexpected manner, we should pay attention. Therefore, if you have been bearish, it may be worth your time to monitor the sustainability of recent bullish moves in copper and emerging markets. Since we are in a confirmed bull market, the odds favor bullish outcomes until proven otherwise. We will continue to monitor all markets very closely, while continuing to give the bullish trends the benefit of the doubt.

Disclosure: The author and CCM clients have numerous positions, including exposure to U.S. tech stocks, foreign currencies (long and short), emerging market stocks, foreign bonds, and commodities. (including copper).

Comments

[chap08:]

Of course copper is not breaking out in every currency. If it was doing that, it would tell you something strong about copper. But it isn't. It hasn't broken out yet in Yen and is nowhere near doing so in Euros. If it's only breaking out in weak currencies, you have to decide what it is telling you about copper and what it is telling you about the currency.

Oct 24 08:32 AM

[Pat Shuff:]

"Dr. Copper, who holds a Ph.D. in economics" based on the metal’s ability to forecast future economic activity.

~~~~~~~~~~~~~~~~~~~~~~...

A PhD in economics and the ability to forecast future economic activity have been long proven to be mutually exclusive. One or the other, not both. Perhaps 'copper,
the idiot savant?'

Oct 24 03:26 PM

[island bear:]

@chap08
Your point is correct.

Long positions in metals in weak currencies (i.e. U.S. Dollars) has been a nice trade over the previous months, but justifying macroeconomic trends seems a bit foolish. Copper's ability to forecast future economic activity may be evident historically but we are currently undergoing a shift in economic trends and relationships. Don't forget about all the Quant Ph.D's that got smoked in the last few years.... I bet they are reevaluating there "forecasting" abilities.

Oct 25 04:31 PM

[Wildebeest:]

agree. the supply and demand situation is not showing a breakout or whatever else pattern watchers want to look for. We need to separate discussions on trading and charting from discussions on the underlying real economy. They are two different things in a market driven by free money.

seekingalpha.com/insta...


On Oct 24 08:32 AM chap08 wrote:

> Of course copper is not breaking out in every currency. If it was
> doing that, it would tell you something strong about copper. But
> it isn't. It hasn't broken out yet in Yen and is nowhere near doing
> so in Euros. If it's only breaking out in weak currencies, you have
> to decide what it is telling you about copper and what it is telling
> you about the currency.

Oct 26 11:35 AM

[ETFdesk.com:]

Commodity brokers say they are becoming increasingly bearish on metals such as copper and aluminum, amid worries that central banks are preparing to rein in the stimulus money. Interesting article: Doubts Grow on Outlook for Copper and Aluminum bit.ly/26dfE8

Oct 26 02:38 PM

[Doc 224899:]

Recalling the complaints made by my contractor buddies the last time copper was over $3, I

Oct 26 04:15 PM

[Doc 224899:]

High copper will make it more difficult for contractors to make profits.

High copper rises the price of products that use alternative energy technology.

Oct 26 04:16 PM

[Mad Hedge F...:]

mms Last February, I told you I would kill myself if you didn’t buy the world’s largest copper producer, Freeport McMoRan (FCX) (click here for the call at www.madhedgefundtrader... ). OK, I exaggerate. I said I would throw myself in front of a train. Who knows, I might have survived the train. Since you all followed my advice, you are all now as rich as Croesus, as the stock has since gone parabolic, from $15 to $85, up 560%. Providing the rocket fuel for this move was copper’s leap from $1.25 to $3.00. Now that we have broken out through the $3 level in the red metal, the next leg may be in progress. CEO Richard Adkerson is the kind of burly, no nonsense kind of guy you might expect to find in an afterhours bar near one of the many open pits the company works around the world. Although Q3 revenues fell from $4.6 billion to $4.1 billion YOY, FCX has reinstated its dividend, and is clearly back in the catbird seat. China is importing record amounts of copper both for stockpiling and consumption by it explosively growing auto, consumer, infrastructure, and power industries. Record gold prices, which FCX also mines, are giving a further boost. Projects mothballed last year are back on track, and idle equipment is going back to work. When I was at Morgan Stanley during the eighties, any association with the red metal was considered career death, as it was in the grips of a 20 year bear market, trading as low as 60 cents.. The guy who covered our big client in the sector, Anaconda, was nice enough, but people avoided his table in the company cafeteria in the GM building like he had AIDS. I have to pinch myself when I see copper’s performance today. I wonder where that guy is now?

Oct 26 06:18 PM

[Past Tense:]

Don't know if it's true but I've heard from the 'business media' that China has to build power infrastructure equivalent in size to the UK's power infrastructure annually for the next 20 years, just to modernize the place. Even with a short term market correction copper miners just might be worth watching/holding.

To me its a much better bet than that 'store of value' but almost 'useless for any practical application' yellow metal...

Oct 26 08:10 PM