Dec. 1, 2005
Copper has rallied almost 30 cents since I cancelled our short recommendation on November 2nd (only one month ago)......and I am now ready to short it again. Picking a top is probably the toughest trade there is in futures but as I remain convinced Copper's initial downswing will be mindboggling in its size and velocity, I believe the risk is worth the potential reward.
If you follow any financial news at all, you probably have recently seen stories about a Chinese trader having shorted "enormous" quantities of copper contracts for China on the London Metals Exchange (LME) and that a short squeeze is now taking copper up sharply into further record highs, the idea being that China is having to buy back equally massive quantities of futures contracts. How much they are short has been rumored to be between 200,000 and 400,000 metric tonnes. This may sound like a lot, but in reality, if you assume the larger number is correct (which it easily may not be), this would still only represent about 16,000 futures contracts, or 4% of the total Copper contracts currently outstanding on the LME. This is not a small position, but by no means would I give it the sort of import the press has hyped it up to be.
My point is: Here is a market that has been going up forever and has, in just the last 4 days, gone straight up 20 cents a pound (see chart below) as everybody is sure the Chinese are in big trouble and having to buy, buy, buy!...To me, this reeks of a totally artificial, and totally unsustainable, "blow off" price move at the end of an extremely ripe bull market... Maybe I'm wrong, but I think the next thing you'll see is an absolute flame out, where copper maybe closes like it did today---dead on its highs---then opens down big the next morning and ends up dropping 30 or 40 cents in a matter of days.
I took my first shot at this in April when Copper was trading at $1.50 a pound....and was dead wrong. Maybe I will be wrong again this time, but to me, this is a bet that, sooner or later, has got to pay in a big way....and the only way to be there when it happens is to keep your money on the table....With all of this in mind, I established new short positions going into today's 9 cent higher close....and recommend you do the same....Give me a call if you want to want to know more.
Charts and numbers follow....
There are various ways to do this....One way is with January put options.