Normally the best position in commodity/equity spreads is to be long the equity and short the commodity. Over the long run, this has led to great risk-adjusted returns. Why? you ask: because over the long run stocks tend to go up by more than the risk-free rate, while cash commodities tend to go up at less than their carry. So that's the default position. But of course this blog involves shorter-term trades, so we have to swing all sorts of ways.
Another way that we can swing is by using the info in the charts for non confirmation. Right now, there is a substantial non-conf in copper. Look at the chart for copper vs. PCU (my favorite pure copper play). It's indexed so that Oct. 1, 2006 = 1.00. Note that copper the metal is down about 25% (this chart includes all carry and backwardations), while PCU is near its highs. How do you square this?
Looking at the supply/demand for copper, the outlook is still pretty bullish. This is reinforced by widespread reports of renewed Chinese buying (corroborated by the stiffening of Asian premia). OTOH, the market still has an enormous long position of new non-traditional money. There's no telling how low the price will get until this is sufficiently flushed out. However, I have been talking to several large copper specs in the last few weeks. Most keep trying to buy it, but get cut by the falling knife.
I think the strength of copper equities is telling you that this is in fact the way to go. However, it also tells you something about timing. The longer-term money goes into the equities; the shorter-term money is being run out of the metal. When the fog of new money spec selling lifts, the fundamental specs will rush back in. At that point, we are likely to have a violent turn. Whether this will come from $2.50, 2.30 or 2.00 is any one's guess.
I intend to play this by buying minor breakouts in the futures. I'll use a tight stop, so I can keep trying. One of these days, the turn will catch, and it will be almost impossible to enter.
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