Is Freeport-McMoRan Inc (NYSE:FCX) the proverbial canary in the copper mine for market bulls? Let’s take a look at FCX stock both off and on the price chart, then offer a limited-risk options strategy based on the evidence presented.
If you’re of the mind that FCX has a more bearish narrative lays ahead for risk assets, Monday’s session may act as confirmation. Despite the broader averages recouping most of their early losses to close fractionally mixed, Freeport stock finished off -4.7%.
Further and as we’ll explore in a moment, FCX continues to paint a potentially ominous picture on its price chart. So, what’s behind the relative weakness? There are a couple items supporting the current bearish narrative for the influential commodity play.
Bears Raid FCX Stock
Company-specific, it has been all downhill for FCX stock since late January when Freeport missed profit views. The company has also been dealing with labor issues at one of its copper mines in Peru, as well as production problems in Indonesia tied to obtaining an export license renewal.
In recent weeks, FCX investors have also likely grown more wary that China is tapering its “growth at all costs” agenda. Not helping matters, over the weekend a Chinese Central Bank governor warned of reflation issues, prompting additional concern from market participants.
Lastly and closer to home, the once-strong drumbeat of “Make America Great Again” from the Donald Trump administration has been nearly silenced and helped, in part, to pressure FCX stock.
Following Friday’s “disaster”, i.e. the trumped-up American Health Care Act failing to pass in Congress, Wall Street is pondering whether it has overshot in its support that a promised pro-growth platform will come to fruition. With great walls and massive infrastructure spending “suddenly” at risk, Freeport-McMoRan has felt that impact as well.
It’s All Bull for Freeport McMoRan
On the flipside and for investors of a contrarian bent, FCX stock is shaping up as a logical choice. For one, there has obviously been lots of bad press and negativity surrounding Freeport that’s already built into the share price.
Investors might also want to consider a firming interest rate environment that’s long overdue following an unsustainable period of easy money. A policy shift just underway could provide support for commodity prices and Freeport’s bread and butter — copper.
Secondly, if Trump’s currently out-of-favor infrastructure campaign, estimated at $500 billion to $1 trillion, actually gets support from Congress (maybe because the AHCA was such an unpopular disaster), FCX stock should benefit handsomely.
Third, what if China, a country known for its deception and game strategy prowess, continues to hoard copper in the face of what it puts out for the mainstream media? Well, that would stand to be good news for Freeport shareholders if a price run in the metal occurred.
Lastly, there’s the FCX stock chart. Despite some classic flaws that might gnaw at some investors, it probably has the algorithms giggling in sound bites and should be of interest to contrarian-minded bulls.
FCX Daily Chart
As alluded to above, it has been all downhill for FCX stock since its earnings report in late January. And to compound matters, on Monday shares broke below a three-week bottoming attempt which, more or less, was finding support from the 200-day simple moving average.
Maybe worse, with FCX’s decline from highs, Freeport now trades below the well-watched, long-term bull/bear moving average — shares are in a classic bear market.
Now for the better news, or at least a decent enough counter argument that this strategist sees as trumping the more ornery view. What the Freeport chart also shows is a stock still setting up constructively in a defined area of technical support.
The current testing in FCX is supported by the 38% retracement level and a fill of the Trump-inspired price gap. As well, the decline appears to be nothing but a common, counter-trend correction within a larger rally that began last January off multiyear lows.
Net, net and now with confirmation of a hammer low in Tuesday’s session, you may not like the bullish opinion in FCX stock at this time, but it has got my vote.
Long Bull Call Spread Strategy
Something else that has my vote is using a limited-risk bull call spread. Personally, if FCX stock’s low fails to hold, I’d be wary that the correction could lead to more bearish repercussions. As much as I am anticipating upside in Freeport and not wanting to purchase shares on additional weakness, a bullish out-of-the-money call spread is the more appropriate strategy.
Specifically and with FCX stock at $12.45, the May $14/$15 call vertical for 15 cents is interesting. Using this Freeport-McMoRan spread versus an outright purchase of the $14 call cuts premium exposure in half. This vertical also has the advantage or potentially beneficial catalyst of an embedded earnings report.
Some might ask, why not use the lower-strike $13/$14 call spread or some other combination? The chosen vertical stresses FCX stock needing to show the trader some real improvement on the stock chart. But, given the devil is in the details, such as the daily chart’s hammer low, it’s this type situation where I can say I’m fiscally conservative and prefer spending less.
Mr. Tyler does not own positions in any of the securities discussed in his personal or managed family accounts, but may initiate a position following the publication of this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
