Copper COT Anomaly

Tracking the copper market over this past year has been a rather fascinating study for me as it has produced some very unusual readings that do not occur very often.

I made mention of one such development earlier this year when noting the "Dueling Speculators" scenario in which the hedge funds were on one side of the market while the other large specs such as floor traders, non-registered CTA's and other private traders of size, were arrayed on the opposite.

Now we have yet another rather fascinating occurrence to note. This time it involves the fact that out of the 5 categories of traders that are reported and broken down, all but one are on the net short side of the market. The category carrying the entire weight of the net long position in the market is the Swap Dealers.

The Commercials - Producer/User/Merchant/Processor are net short along with the hedge funds, other large reportables and the general public. I am not sure why this is the case here with copper but it has been the norm for this year to see the Swap Dealers opposite the Commercial category. Both tend to generally be more closely aligned as to the same side of the market, although I wish to emphasize that it is not always the case nor does it need to be.

But it does strike me as rather odd to see the current configuration.

Here is the actual price chart.

As you can see, the market has essentially been slowly grinding lower since January 2012. There is a channel defined but the upward movement has been growing more shallow this year and has not been able to make it to the upper channel line. That is a sign of persistent weakness.

Thus far those on the short side of the market have been on the correct side although the market has not made it easy at times. It has been under $3.00 only briefly before popping higher but over the last month it has made several trips below $3.00 more frequently than at any time in many years. This is a testimony in my view to the overall sluggish nature of the global economy.

Will this market go in the direction in which the 4 categories are positioned and finally mount a weekly CLOSE below $3.00? I do not know but if it does, it will bode poorly for growth prospects.

While such an occurrence might unnerve some, it should be pointed out that it was not until the middle of 2005, that copper prices began any sort of deviation from its historical norm when it comes to price. Just look at the chart going all the way back to 1992 and you will see what I mean.

Copper at $2.00 is not exactly cheap when compared to the 13 years prior to the breakout in 2005. Maybe copper is reverting back more towards its historical average when it comes to price. If that is the case, $3.00 copper might still be considered rather expensive.

All this of course is dependent heavily on what happens in China but I can tell you this, if growth were to slow at a faster rate in China, and again, no one knows for sure what will happen there, but if it does, copper prices would have some substantial room yet on the downside. That rectangular support zone noted on the chart might just not hold after all!

We are all certainly going to see one way or the other. As a matter of fact, I suspect our monetary masters are also keeping a close eye on this chart, along with that of the crude oil markets I might add.