Through TheFLY's Eyes: Copper

from Theflyonthewall.com














A Technical View

There is an old adage on Wall Street that all Bull markets are topped with copper roofs. This may seem something like an antique way of thinking given that this suggests consumption (demand) in industrial metals peaked before the stock market and that declines in prices were therefore very bearish.

Copper is interesting from a number of perspectives beyond the recent drop in price (today's price is not reflected on the chart or the decline would be larger looking still). In a higher interest rate environment and with some concern about demand slacking the metal has nonetheless nearly doubled in price over the course of the prior four months. This is a spectacular move by any standard, and one that ought to have clear bearish implications in terms of potential inflation.
While producers of the metal may prosper in this sort of environment it is clear at these prices levels that "pass through" of inflation (higher producer and consumer prices) is inevitable if not yet felt.

We can also clearly see that the price for copper in the past has followed the course of bear markets. If we look at the 2000 copper peak in price (though small in terms of today's price) it then dropped some 30% and did not bottom until the markets began to turn up in late 2002/early 2003.

With the recent collapse in price, is it possible the same scenario is underway? We will have to watch the stocks of metal producers (Phelps Dodge Corp, PD - chart correlates highly to copper price) and consumers to get a better picture as well as keeping an eye on copper over the next few weeks. One group that is likely not to benefit from a decline in copper prices are hedge funds which have been long the universe when it comes to commodities of all kinds.

Chart created with Equis MetaStock