Copper tests its mettle

11/20/20
  • Copper pushed to new contract highs this week
  • Market has benefited from housing-market tailwinds
  • Some copper-related stocks have outgained the commodity

Copper may not have rallied as much as oil the past couple of weeks, but it did one thing its commodity cousin didn’t: On Monday the December futures contract (HGZ0) jumped above its October 21 and November 9 highs to hit a new contract high of 3.2625:

Chart 1: December copper (HGZ0), 8/18/20–11/19/20. Pushed above potential double top.

Source: Power E*TRADE


It’s retreated a little since then, but that high marked a 56% gain from the March low, and a 7% bump just from the start of the month. Despite the possibility the market could extend its pullback in the near term, the move may have eased the minds of copper bulls who had been worried last week that the market was in the process of forming a “double-top” pattern on its way to a full-fledged downside reversal.

Like oil, copper is widely viewed as a gauge of economic optimism, as industrial commodities are in  demand during expansionary periods (or when an expansion is anticipated). Copper also tends to get an extra boost from housing-market strength, since it’s a key component of residential buildings, and housing and homebuilder stocks have been on a roll for several months.

That helps explain why, although gold always gets the most attention among metals, copper has doubled its return since March 19:

Chart 2: December copper (HGZ0) and December gold (GCZ0). Record high for gold, copper gained more.

Source: Power E*TRADE


While this week’s rally may have temporarily pushed worries of a major reversal to the back burner among many technical traders, commodity traders are aware that the market is getting closer to a significant resistance level—the late-2017, early-2018 high (around 3.400 in the December futures contract), which was followed by a roughly two-year downtrend before this year’s rally kicked in.

How copper handles that challenge may also play a role in whether mining stocks like copper-heavy Freeport-McMoRan (FCX) can keep a fire burning under their rallies:

Chart 3: Freeport-McMoRan (FCX) and December copper (HGZ0), 7/24/20–9/19/20. Miner outstrips metal

Source: Power E*TRADE


FCX is up nearly 300% from its March low, and has only accelerated to the upside in recent weeks.

So, while you’re keeping tabs on oil, gold, and the dollar, don’t forget about copper. It’s not just for commodity traders—it can send signals about the prevailing economic outlook, as well as tip off traders to potential developments in specific stocks.

Market Mover Update: CIIG Merger Corp. (CIIC)—a SPAC set up to launch British electric van maker Arrival—followed up on Tuesday’s 24% rally with a 27% gain yesterday.

Walgreens Boots Alliance (WBA) pulled back yesterday to the support/breakout level discussed in “Potential cure for a news shock.”

Today’s earnings include: Foot Locker (FL), Hibbett Sports (HIBB).

 

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