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Dr. Copper

thetechnicaltake's picture




 

It is often stated that copper is the metal with a Ph.D. in economics, and the data for the most part bears this out.

Figure 1 is a monthly chart of copper (cash data) with NBER dated recessions noted by the indicator in the lower panel. With the indicator in the down position, the US economy is in recession; when the indicator is up, the US economy is expanding. As can be appreciated, copper does better during economic expansions. The metal typically peaks during recessions before heading into a down trend (see vertical gray bars).  

Figure 1. Copper v. NBER recessions/ monthly

Presently, copper is under performing the broader market, and as we can see from the weekly chart (see figure 2, cash data), copper gap below its 40 week moving average last week, and it is making a lower high. The weakness in copper should be respected, but there is more to the story.

Figure 2. Copper/ weekly

The next graph (figure 3) is a weekly chart of copper (cash data). In the lower panel, is the "Bullish Consensus" data for copper from MarketVane. According to the MarketVane website, "the Bullish Consensus measures the futures market sentiment each day by following the trading recommendations of leading Commodity Trading Advisors." Many investors view the MarketVane data (and sentiment data in general) as helpful in identifying market turning points. For the most part, this is true as we have seen many times how too many investors on one side of a trade often leads to a strong reaction in the opposite direction. But sentient data also has other uses that few rarely speak of, and this has to do with trend following. In essence, as prices of an asset rise so does the degree of bullishness, and as prices fall, investors become more bearish. So what good is following investor sentiment if it just tracks price? My research shows that investor sentiment leads price by about a week or two, so investor sentiment is a good tool at identifying changes in a trend that do not occur at the extremes. Let me give some examples.

Figure 3. Copper v. MarketVane Bullish Consensus/ weekly

Figure 4 shows how investor sentiment leads price. Once again, this is a weekly chart of copper (cash data) with the Bullish Consensus for copper in the lower panel. The black dots represent swing pivot points. Now if we look at the current Bullish Consensus value and compare this value to past swing pivot points, we can make the statement that a close below three swing pivot points is bearish. As you can see, this was the the case in 2006 and in 2008. (This also happens to be the case across time and other asset classes.) When the Bullish Consensus value closed below 3 prior swing pivot points, copper dropped rather precipitously. (As an aside, I am drawing upon my research with pivot points, and I have previously presented similar findings in a SP500 trend following strategy; click HERE to go to that article.) So a close below 3 pivot points is generally bearish, and since sentiment tracks price and as sentiment often precedes price in time, this is an ominous sign.

Figure 4. Copper/ weekly

Now let's move our chart forward in time and look at the past 2 years. See figure 5. At point 1, the Bullish Consensus value closed below 3 swing pivot points. Rather than sell off, this marked the low point for copper before it reversed strongly higher. 8 weeks later, Federal Reserve Chairman Bernanke mentioned QE2 at his speech at Jackson Hole. At point 2, this breakdown nearly marked the high point for copper back in April, 2011. Point 3 was the break down back in September, 2011. Rather than lead to a break down in price, this also marked a bottom. This also happened to coincide with the Federal Reserve's Operation Twist and with the European Central Bank's LTRO. Lastly, turn your attention to the "?????". The Bullish Consensus has closed below 3 swing pivot points. While this normally would be interpreted bearishly, one could easily speculate, based upon the recent past, that central bank intervention is imminent.

Figure 5. Copper/ weekly

So what have we learned from Dr. Copper today?

One. Copper generally peaks during recessions.

Two. Copper is currently putting in a lower high and is trading below its 40 week moving average; copper peaked over 1 year ago.

Three. Investor sentiment not only tracks price but it often precedes it by a couple of weeks. The current price structure for the Bullish Consensus is bearish.

Four. Recent bearish patterns in the price structure of the Bullish Consensus have been bullish owing to central bank intervention. In essence, central banks have prevented a recession from unfolding.

Five. It should noted that each central bank intervention has provided less and less benefit to the markets. When looking at copper, we see that Operation Twist did not produce gains that were seen during QE2. It's as though the markets have become resistant to the effects of monetary stimulation.

Lastly and most importantly. What's next for copper and the markets? The breakdown in the price structure of the Bullish Consensus for copper strongly suggests lower prices for copper, which in all likelihood implies a recession. Central bankers have been timely in their implementation of recent quantitative easing, and we could easily make the case that their interventions have thwarted the onset of a recession on more than one occasion. Copper will need to reverse from the current levels and investors will need to embrace that risk. This will be heralded by a reversal in the Bullish Consensus. Will central bankers be able to save the day again?

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Tue, 04/17/2012 - 11:21 | 2351534 oddjob
oddjob's picture

Global recoverable copper ore yield grades are sinking fast. But, no need to mention that, right?

Tue, 04/17/2012 - 23:37 | 2353579 whartman
whartman's picture

Change in recoverable ore grades is an extremely long term issue.  The author is trying to predict on much shorter time scale.

Tue, 04/17/2012 - 12:26 | 2351825 Flakmeister
Flakmeister's picture

Details..... no need to muddy the waters....

Tue, 04/17/2012 - 11:08 | 2351462 Everybodys All ...
Everybodys All American's picture

Recessions are currently outlawed.

Tue, 04/17/2012 - 06:27 | 2350807 gookempucky
gookempucky's picture

If the morgue has their way copper will always have a bid---maybe jp should just change the name to Store-it-All.

http://www.mineweb.com/mineweb/view/mineweb/en/page504?oid=149432&sn=Detail

Tue, 04/17/2012 - 02:33 | 2350676 ebworthen
ebworthen's picture

Probably enough copper in Detroit to stop mining it.

Central Bankers to QE the markets until the malls and 50% more of the houses are empty.

Another 30% of the population will be living in apartments and on welfare and food stamps.

Bullish for Costco, WalMart, and EBT takers like McDonald's and Pizza Places (and FedEx and UPS).

Bullish for Chinese T.V. manufacturers as everyone will need a new flat panel when they move.

Bearish for the individual and family standard of living, but I don't think you can see the U.S. from the Hamptons or D.C.

Tue, 04/17/2012 - 00:43 | 2350586 Centurion9.41
Centurion9.41's picture

Know what your piece is trying to assert.  However stuff like "The metal typically peaks during recessions before heading into a down trend (see vertical gray bars)" doesn't help you.  Aside from flat lines that drop off a cliff, every down trend is by definition preceded by some type of peak.  

Also, you sound like a negative mirror of the Wall Street sell side; e.g. in the chart mentioned, there's more peaks that weren't followed by a recession than were followed by one. 

What is truly pathetically poetic, one would expect nothing less from a Doctor of The Dismal Science than what Dr. Copper shows; the uncanny ability to call 10 of the last 4 recessions.

Maybe the ChiCom have found a huge vein of copper? 

Which of course begs a very interesting question when a mafia runs a country.  IF the Chinese government did find a huge stash of any commodity.  Given their reputation for distorting government figures.  What's to stop the government from hiding the real size of the find, laying on a massive short position, and starting to F the West?

In fact, couldn't they also do the same on the demand side also?

Ah, the great macro-geopolicial game of finance with Monopoly, I mean fiat, money...

Tue, 04/17/2012 - 03:42 | 2350717 Nukular Freedum
Nukular Freedum's picture

+1.  

As the author himself notes sentiment indicators just seem to move in lockstep with price. And no there is not a one week time delay, lol.  As for your final comments, remind me of a post I did on silver manipulation;

http://pearlsforswine.wordpress.com/2012/04/06/how-to-break-paper-silver...

Tue, 04/17/2012 - 00:27 | 2350559 LowProfile
LowProfile's picture

 

Five. It should noted that each central bank intervention has provided less and less benefit to the markets. When looking at copper, we see that Operation Twist did not produce gains that were seen during QE2. It's as though the markets have become resistant to the effects of monetary stimulation.

Thought that bore emphasis.

Very nice analysis Guy! 

 

Unfortunately (fortunately?) I am convinced, that the masters of the hammer(ing control-P), will keep seeing nails until the ship sinks under the weight of too many pointy metal fasteners.

Tue, 04/17/2012 - 02:19 | 2350671 r00t61
r00t61's picture

I prefer the analogy that Charles Hugh Smith sometimes uses: that of insulin resistance.

Governments of the world pig out with reckless abandon on quadrabazillions of barrels of free cash, but each application of said free cash becomes less and less effective at doing what it's "supposed" to do: reinvigorate the "virtuous" debt-consumption cycle and wealth effect.

When will governments be forced to change their behavior?  When will the economic equivalents of diabetic coma, blindness, and kidney failure start to really take hold?

Tue, 04/17/2012 - 13:01 | 2351951 flacorps
flacorps's picture

For a moment I thought of heroin, but it's a systemic depressant. Crystal meth seems a more apt analogy. Since in addition to contributing to mania it also makes you horny as hell, it explains why the financial class is so eager to f*ck the rest of us.

Tue, 04/17/2012 - 00:57 | 2350598 Centurion9.41
Centurion9.41's picture

"It's as though the markets have become resistant to the effects of monetary stimulation. "

Not yet.  Consider Wiemar:

1914 loaf of bread, 13 cents

1920 same loaf, $1.20

1923, winter of, $100 BILLION that's eleven zeros, $100,000,000,000

But like a drug that just looses it's kick.  When the turn heading down Bowery row comes; it's a hard, fast, and seemingly out of the blue. 

Right now I think the West is somewhere between a Martini and a Ruffie.  But there's definitely Vodka involved.

Tue, 04/17/2012 - 03:27 | 2350703 BeetleBailey
BeetleBailey's picture

War will break out in some form...civil or global somewhere in between...long before the 1923 winter sets in this time.....sad to say

 

LOTS of meds involved here....vodka is a chaser....in the mix definitely....

Tue, 04/17/2012 - 10:05 | 2351227 Centurion9.41
Centurion9.41's picture

True, the cultural values and morality of folks in 1923 Europe were definitely far more Christian in foundation.  Hence more slow to turn to rebellion and murder than today's West where gangs roam the streets under the "morality" of demanding their entitlements.

Tue, 04/17/2012 - 02:36 | 2350678 ebworthen
ebworthen's picture

Gin for my Martini please.

Tue, 04/17/2012 - 06:29 | 2350811 AAA
AAA's picture

GRIN for my Martini please

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