'Doctor Copper' Looking Sickly

 | Nov 18, 2013 | 10:50 AM EST  | Comments
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Stock quotes in this article:

vale

,

rio

,

fcx

We need to take a quick look at copper, even if we're not interested in playing the miners game right now -- which we're not. "Doctor Copper" has been unusually weak, and the commodity has given us no indication of the health of the global economy, as it should have been doing. We need to try to understand why.

For most of my trading life, in attempting to gauge how the economy is doing, I've relied to a certain degree on the relative value of copper. As an industrial metal, copper had been invaluable when it came to understanding the nature of the housing market and the industrial pipe and pumps that make our society go. With a good handle on the direction and strength of copper, you could get real insight into the stocks that were poised to do well.

But, in the last two years, with the stock market on a tear, Doctor Copper has pointed us in the absolute wrong direction. Price action in the brown metal has been sluggish, and has only touched above $4 per pound once in the last five years. That's hardly a bull run.

Copper -- Five-Year

Moreover, no one could find a more pathetic group of investments in the last two years than the miners. Vale (VALE) and Rio Tinto (RIO) delivered the odd trading opportunity, but in the long haul the sector was acting like dead money. See the below chart of Vale in particular.

Vale (VALE) -- Daily

Source: Yahoo! Finance

Copper has become the ultimate proxy for China growth, and the specter of continuing overproduction from Chinese miners has kept the metal in the doldrums, even despite strength in virtually every other asset class over the last two years. Why is the "doctor" so darn sick?

The competition from Chinese production against more traditional producers has certainly been a major factor in the weakness of prices, and the latest Chinese "reform" plan gives me no reason to think that's going to change anytime soon. Freeport-McMoRan (FCX) and Chinese refiner Jiangxi Copper have lifted smelting charges to producers by 31% -- indicative that the two largest processors still think supply is far too deep.

But, at these price levels, the risk in copper is finally entirely to the upside, even if only for the short-term. One look at London Metal Exchange warehousing for six-month stockpiles tells you that a shortage is coming, even if the one-year stockpiles show that it might be less than immediately imminent.

Copper -- Six-Month Stockpile, LME

Copper -- One-Year Stockpile, LME

Still, in the past, opportunities for short-terms trades on the miners have been exceedingly short-lived, and I predict it will be so again this time. I can bless a buy of Vale at $16, looking for a three-month target of $18.50 (a decent 15% bump). However, I fear a return to full health is something that's still years away.

For the near future, we'll need to depend on another indicator and leave the doctor at home.

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