The liquidation in the commodity market has been widespread, affecting everything from gold and silver to oil and basic material stocks. With all the hubbub surrounding the historic gold crash last week, some notable movements elsewhere may not have received the attention they deserve. While my latest commentary zeroed in on the oil market, today we turn to copper.
Persistent strength in the U.S. dollar along with slowing demand from China have relegated copper to the dust bin of underperformance. Known by many traders by its popular nickname “Dr. Copper” because it boasts a Ph.D. in economics, copper is strongly tied to trends in the global economy. If global growth is perceived as robust, copper prices receive a boost. If recessionary fears take root or the overall growth of the global economy is lacking, copper prices usually suffer.
The most dominant pattern influencing copper prices over the past year has been the massive symmetrical triangle identified in the accompanying chart at right. Though copper had already broken the lower trend line of the pattern, last week its downward momentum accelerated. While the current oversold conditions may lead to a short-term rebound, the trend remains decisively bearish.
Copper Total Return ETN (NYSE:JJC) effectively tracks the spot price of copper. Unfortunately, while JJC boasts a high degree of correlation with copper — making it an effective proxy — its options leave much to be desired in the liquidity department. Of all the call options offered in May and June, none have more than 30 contracts in open interest. This lack of activity leaves the bid-ask spreads too wide to consider seriously trading.
Instead of dabbling with JJC, traders looking for exposure to the commodity space could trade a stock whose fate is often tied to copper — Freeport-McMoran Copper & Gold (NYSE:FCX). The top panel in the accompanying chart shows the performance of FCX relative to the S&P 500. Its steady descent means FCX, like copper, has consistently underperformed the broader market. This should come as no surprise since the correlation between FCX and copper has stayed in positive territory the majority of the time, as shown in the bottom panel of the chart.
The last time I mentioned FCX was in a mid-February article suggesting the purchase of April put spreads. Fortune favored us with profits in the trade, so let’s see if we can go back to the well again to score additional gains.
Purchase the June 30-27 put spread by simultaneously buying the June 30 put and selling the June 27 put. In timing the entry I suggest waiting for some type of bounce in the stock. The oversold conditions in FCX increase the odds for a short-term rebound, which will allow you to purchase the put spread for a cheaper price. A rally into the $30 area would provide a compelling entry for the spread.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.