Traders Have Fallen in Love With 'Dr. Copper'

Copper isn't a commodity that many investors keep up with every day. But it's hard to ignore right now...

The metal is up 28% since bottoming last October. That's more than stocks, which have been on an impressive run of their own.

The rising price of copper signals a strong economy. But we also have reason to expect this commodity is nearing a peak...

Copper is loved today. Traders are as bullish on the metal as they've been in years. This sentiment setup doesn't show up often – but when it does, lower copper prices tend to follow.

Let me explain...

Investors talk about "Dr. Copper" for a simple reason. It has to do with the health of the economy...

Copper is a crucial part of modern society. We need it to build homes, cars, appliances, electronics, and more.

Like all commodity prices, copper prices move based on supply and demand. Assuming supply is somewhat constant, a rising price means demand is high. And since copper goes into just about everything we need for economic growth, higher copper prices mean the economy is going strong.

We never got the "obvious" recession everyone expected in 2022. So it's no surprise that copper has been soaring this year. Take a look...

The metal fell when a recession seemed imminent. But then, conditions improved. So copper prices are off to the races again.

This rally has caught the attention of traders, though... And that may be an early warning sign. We can see it in the Commitment of Traders ("COT") report for the metal...

My team and I look at the COT often. It shows us real-money bets in the futures market. When this sentiment indicator hits an extreme, prices tend to reverse – which means it's a great contrarian tool.

You can see the pattern in copper in the chart below. It shows the S&P Goldman Sachs Commodity Index ("GSCI") for copper, which is a benchmark for the metal's prices. And it also shows what happens to prices when traders get too optimistic. Check it out...

Over the past decade, the COT has been a strong indicator of reversals in copper prices. Every time this measure hits a multiyear high, copper starts to fall.

We even saw major crashes in a few of these cases – like the one in 2018...

Copper bets rose to their highest level in years. Shortly after, copper prices tumbled. And the metal lost around a third of its value over the next two years.

This happened again in late 2020. The COT hit even higher levels than it did in 2018. It took a little more than a year... but copper prices eventually fell by around a third again.

We're in a similar situation today. Copper prices have absolutely soared. And many traders are betting the rally will continue. Unfortunately, history shows that's likely the wrong bet.

Now, we don't know if we're near the peak yet... or how long it could be before prices begin to fall. But we do know that traders love copper today. And that usually means the metal is about to pull back.

That's not a reason to worry about the big picture just yet. The economy has remained resilient in the face of everyone's expectations, and the momentum in stocks is strong.

So for now, we'll keep an eye out for a potential slide in copper prices. It could be a warning sign of a looming slowdown in the economy and stock market.

Good investing,

Brett Eversole

Further Reading

Sentiment is at its most bearish level for one often-overlooked metal. But prices are finally back on the rise after a multiyear decline. And for some investors, this reversal could offer an incredible contrarian opportunity... Learn more here.

"Junior gold miners are going stratospheric," Sean Michael Cummings writes. And the gains likely aren't over. Find out what a recent win streak means for these stocks in the long term... Read more here.