Dr. Copper Is About to Make a Diagnosis. Here’s How to Keep Your Portfolio Healthy.

For decades, we market technicians have treated copper (HGU26) as the ultimate barometer for the global economy. It isn't called "Dr. Copper" for nothing; the industrial metal has earned an honorary PhD in economics because its demand is deeply intertwined with infrastructure, manufacturing, and global construction as well.

When copper is rising, the global economic engine is typically expanding. When it rolls over, a broader economic slowdown is usually right around the corner. 

Let’s use the U.S. Copper (CPER) exchange-traded fund (ETF) as a proxy. It is straightforward in its construction, simply holding copper futures out one, three, and six months.

CPER thus acts as a daily liquid, stock-market-listed vehicle to participate in the price movement of that commodity. This ETF is nearly 15 years old and has about $730 million in assets.

What Is Dr. Copper Saying About the Economy Right Now?

True story: I was going to write this article a while ago but held off because I saw CPER possibly setting up for a move that would help solidify its near-term price path. That recently happened — and it looks lower.

That PPO indicator is “bleeding,” as I like to refer to it. That’s a series of lower lows and lower highs. The price action is just starting to catch up to it. For the record, I see this all over the markets, from commodities to stocks. It leads me to believe that Dr. Copper has some bad news for us: that the economy is rolling over. And not in the way that copper, the commodity, is rolled for industrial use.

While CPER tracks the price of copper closely, the other route investors take is via ETFs that own copper-producer stocks. The Global X Copper Miners ETF (COPX) owns the majors, the bigger-cap stocks in the industry, while the Sprott Copper Miners ETF (COPJ) owns the minors. These miner funds have historically acted as high-beta versions of owning the metal through CPER.

COPX, a $7 billion ETF, is range-bound, which indicates that perhaps the stocks are a half-step behind the commodity. But I don’t see anything inspiring here. 

COPX holds about 45 stocks, though half of its assets are spread across just 10 of those stocks. The ETF has decent-sized positions in several stocks. Seventeen names have at least a 3% position weighting currently, and the biggest holding is still only 5.7% of the total fund. That tells us that, unlike many tech ETFs, COPX has many ways to win at the single-stock level. 

And since the ETF represents several geographic regions and countries within those regions, to the extent that that diversification can act as a hedge at times of broad copper pricing weakness, COPX can benefit. About one-quarter of the fund is allocated to each of Europe and Asia, with U.S. copper mining firms comprising the remaining half by weight.

When copper stalls out, it typically indicates that the global manufacturing business is slowing. Beyond the friction in many commodity markets due to the closing of the Strait of Hormuz, there is a growing sign that real-world industrial demand isn't growing at the pace needed to justify extended commodity valuations. COPX’s portfolio sells at 19x trailing earnings, which is no bargain.

A sudden pullback in copper is a classic reality check for the economy, and by association, the stock market. Other commodities, such as oil and gold, have spiked in recent months. But when Dr. Copper speaks, we had best pay close attention. 

Rob Isbitts created the ROAR Score, based on his 40+ years of technical analysis experience. ROAR helps DIY investors manage risk and create their own portfolios. For Rob's written research, check out ETFYourself.com.