Dr. Copper May Be Terminally Ill, But…

What should be big news isn’t getting that much play and that’s the total collapse in copper prices, mostly due to China’s weakening economy. Copper has long been called Dr. Copper or the commodity with a PhD in economics because it was a good forecasting tool. Since late 2010, that all changed and it’s likely because of China’s influence on that market.

Copper has completely collapsed on a short-term basis, semi-collapsed on an intermediate-term basis and is on the verge of collapse long-term.

copper

copper1No matter how you slice it, whether it be the global economy or just China, the action in copper is not a good sign. And no, I am not a believer in some preposterous conspiracy that JP Morgan has been manipulating this or any commodity, got stuck and had to put their commodities unit on the block.

To me, China’s weakening economy and housing bubble is the primary culprit.

As ugly as copper has been, it now looks like we have a short-term flush out and the bulls should have an opportunity to move the metal higher for a short-term trade. Closing below last week’s low of $2.87 blows up that scenario and means the bears are in total control. Not bad risk/reward ratio.

Long-term, there is much work that needs to be done to repair the severe we have seen of late. Just like copper peaked long before anyone started discussing China’s economic weakness, I expect the metal to bottom before the fundamentals suggest a turnaround.

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There is Always Something to Buy

Like a broken record, stock market sentiment remains at rally killing levels as it has for the past two months or so, but that certainly didn’t prevented us from taking full advantage of the Santa Claus rally. Now that the calendar turned and the most bullish period of the year has ended, the tailwind for stocks isn’t as strong. As the market has been for some time, it is stretched, very overbought and in need of good 5-10% pullback.

The very short-term can probably go either way with one more all-time high push this week or an immediate decline, but I do not believe a push higher will ignite another leg higher. Once last week’s low is closed beneath on a daily basis, the market should smack in the middle of the 5-10% pullback. Again, the bull market is not over and any weakness remains a buying opportunity until proven otherwise. Dow 17,000 or higher remains in sight.

The secular bull market in the dollar turns a very quiet 6 years old in March and we should see some real upside fireworks this year. I am most intrigued by the Treasury bond market here as sentiment continues to be awful and price is just starting to percolate. We have already seen very strong moves in the investment grade bond market which you can see using LQD and the much maligned muni bond market is showing some good signs this year. Use MUB as a proxy for that.

While I do not like commodities as a whole, copper has a short-term set up that has at least 2:1 risk reward to the long side. Corn looks really interesting here as sentiment has been at bear market killing levels and price is just beginning to turn around. Hmmmmm. That could be just a short-term play or end up being the trade of 2014.

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