Perma-bears… look away now.

This post is not for you… maybe you can read this or this

There’s always plenty of bearish sentiment and warnings to choose from.

Take your pick.

Today, you will have to find “glass half empty” somewhere else (maybe try the Daily Reckoning!)

In a moment we are going to check-in with “the Doctor”… ie copper.

It’s often a good indicator about what the market expects opposite growth.

But before hand… some fresh (bullish) data out of Europe:

According to TheStreet:

  • European manufacturing activity held at its fastest pace in more than six years, according to a benchmark survey, suggesting the region’s economy will continue to expand into the second half of the year and that European stocks could outpace gains in the United States.
  • IHS Markit’s final Manufacturing sector PMI reading for June was measured at 57.4, the highest since April 2011 and marginally ahead of the flash estimate of 57.3 and the May reading of 57.0.
  • The survey also showed that the pace of job creation in the sector, which provides the lion’s share of employment for the broader economy, remains close to a two-decade high

We have been talking to Europe’s expansion for a while… so this should not come as a surprise.

However, don’t take that to mean they have fully recovered. But this a good sign…

But let’s get back to Dr. Copper…

For those not familiar with the red-metal… it has earned the nickname from its ability to forecast economic growth (or lack of!) For example – consider the following widespread uses:

  • used as conductors for cabling;
  • used as pipes for water systems;
  • used as an alloy in the manufacture of other metals;
  • sheeting may be used in buildings for roofing; and finally
  • can be found in tablets for vitamins and minerals.

When it comes to infrastructure – its use is ubiquitous. You won’t find many building sites without copper somewhere.

In more recent years, copper has been a great barometer for the Chinese economy.

No other economy has scaled infrastructure investment at the same magnitude (or speed). Then again, no other economy has also taken on so much credit ($24T in 14-years). We digress…

Not only has the Middle Kingdom been buying the metal from all sources of the planet — they have been investing heavily in its production to secure its future supply (and perhaps a great control of its price):

According to this November 2016 article:

  • The move is part of a series of agreements signed this week that will see China pouring close to $5.3 billion into Peru’s mining and energy sector
  • A similar agreement was reached with Zhongrong Xinda Group Co. to finance Hierro Pampa de Pongo mining project in Arequipa, with an investment close to $1.5 billion.
  • The massive investments are expected to consolidate Peru as the world’s second largest copper producer, behind Chile, Carlos Galvez, president of the National Society of Mining, Petroleum and Energy (SNMPE) said.

As an aside, the Chinese also took control of the metals exchange when they bought the London Metals Exchange (LME) for 1.4 billion pounds sterling. Another discussion…

But let’s look at the price action… is copper turning bullish on the globe’s growth potential?

The Price Action…

Copper (not unlike other metals) hit its all-time peak in 2011 — when the nearby COMEX futures contract traded at $4.65 per pound.

But it didn’t last long… what goes up inevitably comes down.

As the Chinese (and global) economy cooled — the demand for the red-metal dropped – sending the price to $1.94 per pound in January 2016.

From there, copper spent ten months consolidating from around $2.00 to $2.30. However, things looked a little more optimistic last November when prices began to tick higher.

Demand improved and inventory levels dropped.

The price reached a high of $2.84 per pound for the active month July futures contract in late February 2017, and since then, copper has been trading in a range, leaving traders to guess its next move.

Copper Futures: HG20 – July 03 2017

A couple of things:

First, our weekly intermediate trend is bullish.

We highlighted the shift to blog readers in November of last year – suspecting a move was on the way. We got it.

However, after the sharp run higher, copper has been caught in a distribution for almost 9 months. Let’s zoom in:

Copper’s 9-Month (Tight) Distribution

What’s interesting (from mine) is copper has been holding up opposite (sharp) losses in other industrial commodities.

Now part of this is the recent weakness in the US dollar — which has helped all commodities catch a bid.

However, as we see below with this 5-year chart – global copper inventories (warehouse stock levels) are also declining:

The Trade…

A bet on copper is also a bet on China (and specifically their infrastructure growth)

The central authorities appear to be a doing a good job of landing their (credit fuelled) economy softly (note: expect further Yuan depreciation late October and/or lower rates)

And whilst there is plenty of evidence to suggest things are slowing… what’s important is they are not crashing (as many expected).

For any traders looking to gain exposure (or trade) China — a good proxy is the US-listed ETF FXI (iShares China Large Cap)

Today things are clearly bullish (mirroring what we see with copper).

Using the weekly intermediate timeframe (plotting the 10-week and 35-week EMA with Yahoo! Finance) – the ETF reversed its bearish trend the week of July 18 2017.

As such, we would look to trade this from the long-side only.

The ETF is now finding expected resistance around our 61.8% zone of the distribution — after hitting its highest level since July 2015.

From here, if looking to enter the trade long, look for a pullback towards the 35-week EMA before it catches a bid higher. And should the trade fails – set stops just below the major low of December.

Putting it All Together

Copper is working through a 9-month distribution.

In recent months – this price has been boosted by both falling inventory levels and a lower USD.

Using the ETF FXI (as a proxy for Chinese growth) – we see a strong bullish trend.

Probabilities tell us not to be short China (or copper) at this juncture. Traders appear to be more optimistic about global growth than pessimistic.

… trade the tape

When investing in shares, you can lose you some or all of your money. The potential gains on my blog are based on investing in Australian and US markets and don’t include taxes, brokerage commissions, or other fees. It’s important you seek independent financial advice regarding your particular situation. For any investment, never invest more than you can afford to lose, and keep in mind the ultimate risk is that you can lose whatever you’ve invested. If in doubt – always seek independent financial advice.

Leave a Reply

Your email address will not be published. Required fields are marked *