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Copper and the Commitment of Traders Report

Chart In Focus
April 29, 2011

Commercial traders think that copper prices have no business being so high. 

The weekly COT Report is published by the CFTC, and it lists the total positions held by commercial, non-commercial, and non-reportable traders of futures contracts.  The commercials are the big guys who hold huge positions, and they presumably got to be the big guys by being the smart guys.  Non-commercials are the large speculators, usually consisting of hedge funds.  The non-reportables are traders whose positions are so small that they are considered not even worth individually reporting, according to the CFTC. 

This week's chart shows that the commercial traders have moved to a big net short position.  This means that, as a group, the commercial traders are betting that a big decline is coming in the future for copper prices.  One point to understand is that while the commercial traders usually end up being right in the long run, they are often early in adopting their lopsided positions.  So the commercial traders' net position should be thought of not as a timing signal, but rather as potential energy ready to be unleashed once the time is right.

A pending decline in copper prices would be a significant issue for stock market investors because of the strong correlation that copper has shown to stock prices in recent years.  Copper prices and the SP500 have been very strongly correlated, but with an interesting twist.  Whenever there is a divergence, it is usually copper that ends up telling the truer story about where both are headed.  

That is especially relevant right now, as the SP500 is zooming ahead to multi-year highs, while copper prices are nearing the lows for 2011.  Copper is not confirming the higher highs in the stock market, and commercial traders of copper futures are making a big bet on copper heading lower.  So unless the strong correlation between copper and the stock market is about to break down, or unless the commercials are going to suddenly turn out to be drastically wrong, this is a bad omen for the stock market. 

At what point this bad omen finally starts to matter remains to be seen.  My bet is that it will really start to matter in June, when the Fed's POMOs end, and the period of favorable seasonality switches to unfavorable.  Get ready to cinch up your seat belts. 

Tom McClellan
Editor, The McClellan Market Report

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