Equity bears often look to the copper market – affectionately known as “Doctor Copper” – to assess stock prices’ potential future.
Since May, that picture hasn’t looked good.
As U.S. stock markets ratcheted higher this year, copper has fallen. That divergence serves as a note-worthy warning.
Here’s a chart of copper futures this year…
After dropping about $0.63 per pound, or roughly 15%, during the first four months of the year, copper found a bottom. Briefly.
A quick dead-cat bounce brought copper prices back up to $3.40, but the bulls couldn’t muster any more than that. As you can see, prices fell back down in short order.
Now, we’ve just watched copper test that overhead resistance zone – between $3.30 and $3.40 – once more. And again, the bulls couldn’t spur a break above this level.
That means the prevailing copper trend is still down. That’s bad news for stocks. And it’s an opportunity to get into a hedge trade at a good price.
Betting against copper, via a short sell, is one way to hedge against falling stock prices. iPath offers an ETF that tracks copper. The ticker symbol is JJC. And it looks to be a good short with an entry between $39 and $41.
Place a stop-loss at the last significant peak of $42 to minimize risk.