Its time to keep an eye on copper

Key points

• Copper will soon enter one of the most seasonally unfavorable parts of the year
• While year-to-year results can vary greatly, the long-term trend has been unmistakably bearish
• May has historically been the weakest month of the year for copper

Copper is soon entering a seasonally unfavorable period

Copper has shown a historical tendency for price weakness between Trading Day of the Year (TDY) #82 and TDY #123. In 2023, this period extends from the close on 2023-04-27 through the close on 2023-06-23. The red box highlights this period in the annual seasonal chart shown below.

Note also that May has historically been the worst month of the year for copper.

A closer look at copper in late spring

The chart below displays the hypothetical $ +(-) achieved by holding one copper futures contract only during the TDY #82 through TDY #123 period, every year starting in 1960 (copper futures contracts began trading in 1988. Before that time, cash copper prices are used for testing purposes).

The table below summarizes performance during TDY #82 through TDY #123. 

The two key things to note are:

• There is no guarantee that copper will decline during this period in any given year
• The long-term tendency for weakness is unmistakable

CPER as an ETF alternative

The United States Copper Index Fund ETF (ticker CPER) is designed to be a convenient, cost-effective way for investors to access the returns of a portfolio of copper futures contracts. As such, it also has tended to show weakness during the seasonally unfavorable period highlighted above.

The chart below displays the hypothetical growth of $1 achieved by holding long ticker CPER only during the TDY #82 through TDY #123 period, every year starting in 2011 (when CPER began trading).

The table below summarizes CPER performance during TDY #82 through TDY #123. 

What the research tells us…

The caveat with seasonality is always the same: There is never any guarantee that a given seasonal trend will play out as expected each time around. There is no reason copper futures (and ticker CPER) cannot rally over the next month or so. But the real issue for traders to ponder is "how best to allocate capital." If one has a solid reason to believe that copper will rally soon, then a long position (preferably with a reasonable stop-loss point) can make sense. Under any other circumstance, history suggests that the long side of copper is best avoided. Traders who are so inclined - and capable of understanding and managing the risks involved - may consider playing the short side of copper during this seasonally unfavorable period.