From the Desk of Ian Culley @IanCulley
Metals have been one of the weakest areas of the market this year.
It doesn’t matter if we’re talking about the materials sector, commodity space, base and industrial metals, or gold. These assets have carried nothing but downside risk.
But mix in a little dollar weakness, and we see an impressive display of strength. Metals are finally looking like they have something to prove.
Yes, it’s only one day of action. But it’s a day worth noting…
Check out the breakout in copper futures, posting its largest single-day return since 2009:
This is a big development for commodities and risk assets in general.
Copper has found support at its prior cycle peak and is now resolving higher from a three-month consolidation. One of the most-watched leading economic indicators is signaling all is well.
Based on Dr. Copper's bullish breakout, we would expect metal and mining stocks to join the party.
And they are!
Copper miners are up almost 10% halfway through today’s trading session:
It’s not surprising the Copper Miners ETF $COPX looks almost identical to copper futures, coiling right above its 2018 highs.
Today’s upside resolution in COPX marks its largest single-day gain since 2020 and confirms stocks and futures are on the same page.
This adds to the conviction of the move, as does the strength from the Metals & Mining ETF $XME:
It’s jumped 5.5% Friday as it holds above a key polarity zone.
As long as XME trades above 40, we want to give it the benefit of the doubt. And if copper and their associated miners are working, XME should too.
Steel stocks represent another area of the material space that should benefit from copper’s breakout.
The Steel ETF $SLX chart isn’t as clean as XME, but it’s constructive:
SLX undercut its 2018 highs in July and has chopped around that level since. Despite the messy nature of the chart, it’s hard to be bearish SLX above 50. Risks are to the upside as long as it’s above that level.
So far today, it’s gained more than 6% with an intra-day high of 56.51 – not bearish!
If these moves stick, we imagine participation broadens among the value cyclical sector. Since many of these stocks have been beaten down for the past decade, this also means small-cap leadership.
But like many of the commodities, these metal and mining ETFs need to hold above their prior-cycle highs. That’s our line in the sand.
If XME, SLX, or COPX lose their respective support levels, we’re likely in an environment where both commodities and natural resource stocks come under increased selling pressure.
For now, these underdogs are proving they belong in our portfolios.
Stay tuned!
COT Heatmap Highlights
- Commercial hedgers continue to add to their long position in cocoa as they approach a three-year extreme.
- Commercials are buying gold again, holding near their largest net-long position in three years.
- And the unwind in the dollar is underway as commercials have dropped over 3,000 contracts in the past four weeks.
Click here to download the All Star Charts COT Heatmap.
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