Copper Market Rapidly Turns Murky

Includes: COPX, CU
by: Ananthan Thangavel

Copper remains an interesting market, with the red metal actually eking out a fractional gain on the week even with other risk assets falling. As we predicted, Managed Money has regained a fondness for copper. However, much to our dismay, the increased interest by speculators is not having nearly as dramatic an effect on prices as we would have hoped.

The following chart shows copper prices in white and Managed Money net longs in amber.

Copper CFTC Chart
(Click to enlarge)

As can be seen, copper Managed Money has added hugely to net long positions in the past few weeks. Net longs have increased an astonishing 901% since May 24th. However, in the same period, copper prices have advanced only 10% and remain 5% below all-time high levels. In the past week, Managed Money net longs increase 23% but copper prices increased only 1%.

The fact that Managed Money has returned to the market, but prices have not moved much is a foreboding sign for copper. This indicates a very large and willing seller in the copper market which is absorbing all of the long speculation. Producers seem to be very willing to sell to speculators at these prices, which is always a bad sign.

To make matters worse, the bullish inventory draw we reported last week may have been a headfake. Shown below is a chart of LME copper inventories.

Copper Inventories Chart
(Click to enlarge)

As can be seen, inventories have completely leveled off and given no indication of their current trend. If inventories continue lower, this could support higher prices, but if inventories turn higher again, copper prices could fall below $4 very quickly due to long speculators’ liquidation.

Trade Recommendation

We recommend selling copper longs and staying on the sidelines for now. With the outlook unclear at the moment, investors would be wise to cut long exposure and wait for the picture to become clearer. Aggressive traders could enter into small short positions, especially as a hedge against other long commodity positions, but they run the risk of being early to the party. We will keep our eye on this metal and keep you apprised of developments.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: All information included herein is the opinion of the firm and should not be considered investment advice. Past performance is not necessarily indicative of future results.

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