In just three days in September, it is as though August never even happened. The S&P 500 and large-cap technology stocks such as Apple AAPL, Tesla TSLA and Amazon AMZN have all given up most of their gains made in a quiet August.
If you were mindful enough to have realized your luck and cashed out, kudos to you. But if felt you were making this money because of pure "alpha" and "edge," then that is a fallacy.
Tesla is down 30% and Apple down 20% since the ridiculous highs made into their respective stock splits. But then again, these stocks were never about valuations; they are about sentiment and momentum, especially as the Federal Reserve is bent on keeping rates closer to zero.
If one observed some flashing red lights in August, one would have done well to monetize on the surge. Is this a healthy reset as the bulls say or is this the start of a much deeper correction? Time will tell.
Another theme that started gaining traction was the shift away from growth into value given the generational buying opportunity opening in value. Just to reiterate, this generational opportunity existed in June as well, and yet these value stocks have gotten decimated even further. These last three days are a clear example how cheap can get cheaper, especially when there is no fundamental or momentum rationale and everyone is positioned long waiting for a rally.
Energy and Financials both got smoked as they dropped 5% to 6% on average on Tuesday. Oil's price is down 15% since Sept. 1 after spending months consolidating in a tight range. Most thought it was cheap enough and are not sure why it fell. There is simply just too much supply, with demand still 10% below pre-Covid levels and almost twice as low as back during the Great Financial Crisis in 2008. Not to mention, we still have OPEC+ with 7.7 million barrels per day sitting on the sidelines waiting to come back as producers cut production back in April in hopes of restarting once markets normalized. Until demand picks up, this is not going to happen.
But what caused this "healthy reset," as many call it? The positioning in the dollar. It had been stretched, with everyone too bearish and positioned that way. This, combined with economic growth that has been slowing after the initial euphoric bounce post-lockdown, caused a reset of lofty expectations.
Gold is down 6% and silver is down 10% from their highs. There is one anomaly in this dollar backdrop that seems to stand out: copper. It was up 7% in August alone and up 45% since March. The rally from March through July is understandable given the liquidity pump and post-lockdown demand coming back. But as the global economic data has faltered and the dollar rallied, copper, which is usually the gauge for health of the overall economy, has been holding here around $6,700 per ton, watching its brethren succumb to the macro weakness.
Positioning in copper is the most bullish it has been since the second quarter of 2018. Open interest has since rebuilt as funds have lifted outright long positions from under 30,000 contracts in early April to a current 89,815 contracts.
To be honest, China's draw on the refined metal has been unprecedented over the last few months. The preliminary August headline figure showed Imports of unwrought copper and copper products into China totaled 668,486 tons last month, the General Administration of Customs said. The momentum was down 12.3% from a record 762,210.9 tons in July but still up by 66% from August 2019.
If August's refined copper component conforms with recent patterns, it would mean China has imported 3.03 million tons of refined metal. That's 833,000 tons more than was imported in the first eight months of 2019. Imports already exceed the total annual intake of 2009, when Chinese buying last turned around a bombed-out copper market.
The fundamental picture has clearly been in favor of copper's price, no doubt. But one has to be cognizant of how much has already been priced in at a time when China perhaps may be cooling down after the initial surge. Infrastructure and copper-intensive investments are always the easiest and fastest way to get GDP back to some normalcy, and that is what China did to avert the post-pandemic collapse.
The next few days will be telling, but if the macro headwinds continue to persist and the dollar catches most off guard, then copper also will be a victim of this unwind no matter how strong its fundamentals have been. The elastic band theory always holds; it can only stretch so far until it snaps back toward its mean tensile strength. After all, even Apple and Tesla fell from their grace this month.