Massive Short Squeeze in Copper

Copper had its single largest daily gain in over a year and a half in today's session coming on the heels of the payrolls number. That, combined with stock drawdowns in both Shanghai and in the LME warehouses, sent shorts scrambling for cover. Once their buying tripped some key technical levels, the algorithms took over and bought everything in sight. The result - a gain of nearly 7% in a single day.

Drawdowns in copper stocks are notoriously unreliable signals however as some less-than-scrupulous players have in the past, simply bought copper, moved it out of the official warehouses and stuck it elsewhere all to give the idea that demand is robust. That allowed them to play the market from the long side claiming that supply was insufficient for current levels of demand.

Personally I think any rallies in copper should be sold but trying to find a place from which to do so will be tricky once you get a squeeze of this nature. I think it is important to note that the COT report from today showed Hedge Funds NET SHORT by a nearly 2:1 margin. In other words, there was the potential for a significant amount of buying once price tripped the computers. Apparently copper below $3.10 attracted sufficient value-based buying to prevent it from violating that key support level. A market then that refuses to go down, will go up and that is what happened.

I would want to see further economic data releases to confirm that global growth is sufficiently robust to justify an uptrend in copper prices.

Today's payrolls number was not particularly impressive to me but I think it was the upward revisions to the previous months that sparked the aggressive risk-on related buying.

Consider the fact that the Euro, which just yesterday was clocked as a result of the rate cut over in Euroland, moved strongly higher while the Yen sold off rather sharply and the US Dollar moved lower. Bonds were crushed simultaneously confirming that the RISK AVERSION TRADES were reversed to RISK ON trades.

Who knows what these damned schizophrenic algorithms are liable to do next week? While the payrolls number caught some off guard, it was certainly not strong enough to suggest an economy doing anything other than muddling long. The Central Bank reflationary efforts are keeping matters stabilized and preventing conditions from deteriorating excessively; however, they are most definitely not resulting in robust economic growth either.

None other than Fed Governor Lacker himself stated as much today in a speech when he commented, that the idea that monetary policy could have made growth 3% is "Preposterous"! He went on to say that Monetary Policy is "NOT CAPABLE" of offsetting limited growth.

IN other words, the reflation efforts by the Central Banks can stave off the worst of deflationary headwinds but it cannot generate solid, SELF-SUSTAINING economic growth. It is nice to know that a Fed governor is saying the same thing as I am saying.

The stock market perma bulls will have none of that however as they will buy and keep buying equities no matter what. As long as the combination of the Fed and the Bank of Japan keep printing $160 BILLION each month of funny money, hedge funds will keep borrowing it and plowing it into equities and keep coming up with reasons to justify stocks at current levels.

That brings me to this final chart for now. My beloved Continuous Commodity Index or CCI, seems to have disappeared into the cosmos. I have been unable to get the data from ICE which appears to no longer be generating the index. Thus I have switched over to the Goldman Sachs Commodity Index, which is better weighted in my opinion than the Reuters/Jeffries CRB index, which I believe is too heavily weighted in energies provide a true assessment of the commodity sector as a whole. The GSCI is more evenly weighted in much the same manner as the CCI was.

Notice on the chart that while the commodity sector is not breaking down, neither is it roaring higher either. It anything, it is forming a constricting triangle pattern. That is indicative of a market that is uncertain as to what it wants to do next. As I noted on the chart, the Central Bank's money printing schemes and easy monetary policies, have keep the sector as a whole from further imploding. However, just as Fed governor Lacker stated today, neither is it resulting in 3% growth or higher. It is enough to stave off deflationary pressures that would drive the price of most commodities lower but not enough to overcome the fundamental roadblocks to strong, sustained growth.

This condition seems to me to be what we can expect as we move through the rest of the year. Monetary authorities are hoping that if they keep money cheap enough, long enough, the problems in the economy will somehow work themselves out. Maybe they will; maybe they won't. My bet is that they will not and that efforts to throttle back on bond buying programs, especially important for the real estate markets, will see stock prices swoon. As usual, time will make things clearer for all of us.