Since the middle of February, Copper prices have fallen from a high of $4.62 to a fresh low of $3.45 – this has my attention; it should have yours as well. Copper is known to many traders as “Dr. Copper” because of its ability to predict overall demand/supply in the economy. However, Copper is not heavily traded. Its option market is thin, and its short term correlations are fleeting. It is recognized more for its ability to lead the market on a long term basis and provide turning points in economic activity. Despite the fact that it is a leading market, that does not make copper a good vehicle to trade.
Copper should not be ignored. In fact, it should be one of the charts that long-term and swing traders should pay more attention to. Copper tends to be at the front of commodities rallies, as we saw in 2001 and 2008. As a base metal for expanding infrastructure, copper rallied hard this last decade due to easy money policies in addition to the ramp up of building in Asian and South American markets. After the US Housing crash, commodity prices picked back up because of a renewed demand coming out of China, India, Brazil and other developing countries. Copper led the way and made new highs just before the overall commodity complex made highs. The prognosis for a continued commodity rally was seemingly positive.
The diagnosis from Dr. Copper has not been pretty as of late. With the current European situation continuing to spiral and the decline in global GDP, copper has seen a 20% drawdown from its highs at the end of July, officially positioning itself into a bear market. If past performance repeats, then equities and the commodity complex should follow it into bear territory.
As you can see from this chart below, copper has been leading the commodity complex higher. During times of economic contraction (2001, 2008, and maybe 2011), we have seen copper regress and leading the way as the commodity complex turned lower. Many believe the break we have recently seen in the copper market can be credited to hedge funds lifting bullish bets on commodity prices going higher because of the constant downgrades of GDP around the world. No growth means there is less need to build new things, which means no fresh demand for basic materials. You can see the affect copper has on the Commodity Index by looking at the chart below.
CI-CRB-CCI-Index
The overall commodity index (black line) and the copper futures (green line) have been heavily correlated. Ever since the Federal Reserve opened the liquidity faucet in 2001, copper has been leading the other markets higher. Just by looking at this monthly chart, we can see that the overall commodity index has lagged and did not have any success moving higher unless copper was moving higher.
These correlations are not gospel; they might change as economic policies do. However, the fact that copper has entered a bear market has to sound the alarm that the massive bull market seen in commodities since the worldwide financial crisis in 2001 might be coming to an end.
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