We have been bearish about copper prices for three main reasons:
- The lag between higher prices and the increase in supply they encourage is long and the processes involved are hard to stop. This leads to cyclicality - new supply emerges whether current demand is strong or weak (as it is now) and if it comes at a time of economic downturn then a long-lasting reversal of the prior up-move occurs. We deal with this in our video: HED -coping with markets starting at around the 21 minute 15 second mark.
- Top extensions at a daily-scale on a rally that ended in March, as reported in the March 10th edition - see 1st chart below
- The break downward from weekly-scale compressions that occurred earlier this month as reported in the May 11th edition - see 2nd chart below
Since that push down below the weekly-scale compression four weeks ago, prices have been trading in a narrow range but the outlook is still for more weakness to come. Most recently there has been a small rally within the range so this is a good moment to take short positions if you have not already done so. We had no room in the portfolio when this compression first broke but will now adopt this trade.
A note on the general situation in world markets:
We have been bullish about equity prices (we still are) and about some commodities too in recent weeks but these assets don't always move together. The high degree of correlation that has sometimes gripped financial and commodity markets (the so-called 'risk on/risk/off' phenomenon) in recent years has been mostly because of the complete confusion about the underlying 'fundamentals' in each market and the direction that markets should take if common sense should re-assert itself. The distortions caused by the large-scale activities of over-mighty central banks is the main cause of this confusion and the trading crowd has become even more skittish than usual and prone to exaggerated herding behaviour - imagining and creating connections where none should exist. This odd situation will produce many good opportunities as it unwinds and we are vigilant. More on this in the months to come.