Momentum turns negative for the commodity with a Ph.D. in economics
Key points:
- Copper momentum has turned negative on a rolling 1-year basis
- The price momentum reversal occurred after copper rallied more than 100%
- Similar conditions preceded weak performance for copper across multiple time frames
Momentum turns negative for the commodity with a Ph.D. in economics
Let's conduct a study to assess the outlook for copper, commodities, and stocks when the 252-day rate of change for copper exceeds 80% and then reverses below 0%.
Copper, like most commodities, rarely maintains a bullish trend for an extended period. The 2002-08 cycle is the exception.
Similar reversals in momentum preceded negative returns
This study generated a signal 7 other times over the past 57 years. After the others, copper returns, win rates, and risk/reward profiles look unfavorable across short to medium-term time frames. The reversal in momentum marked a significant peak in copper in 5 out of 7 instances. 1965 and 2007 are the only signals that recovered and eventually recorded a new high. The sample size is small.
Similar reversals in copper momentum preceded positive returns for commodities
When I apply the copper signal dates to the Bloomberg Commodity Spot Index, the outlook table suggests that a broad basket of commodities can continue to rally. The 6-month time frame looks excellent.
Similar reversals in copper momentum preceded positive returns for stocks
The outlook table looks constructive when applying the copper signal dates to the S&P 500 Index. Several time frames show an 86% win rate. However, I would note that returns are somewhat limited in the first few months.
What the research tells us...
When the 252-day rate of change for copper exceeds 80% and then reverses below 0%, the shift in momentum typically leads to more adverse price action for copper. Similar setups to what we're seeing now have preceded unfavorable copper performance, win rates, and risk/reward profiles across short to medium-term time frames. If we apply the signals to commodities or the S&P 500, forward returns look significantly better in both cases.