Ever since the copper trade of a few months ago, I've been watching this market particularly closely. It looks to me like we are sort of getting a bear signal now. Look at the chart on the left (click to expand). There's an obvious divergence between copper futures (solid line) and PCU. In my view, PCU would have also broken down, except for the relentless bull market in equities. However, my valuation measures are saying that stocks are not badly undervalued (more on this tomorrow), although still not too high. A short on HGN7 or PCU might be just the ticket here. As readers know, my gut is to short the metal rather than the stock, but they should move pretty much in line.
This is the first commodity-related short I have put on for almost three years. I must say that I am definitely not a believer in the the long-run raw material shortage hypothesis (also known as the Clubheads of Rome). To me, the current bull market is just another cycle, brought on by underinvestment over the last ten years or so. Oil might be a little different, because of the political issues. However I have no doubt that we will see MUCH LOWER prices for things like copper, nickle, and soybeans three years from now. Maybe I am being a little premature in putting on a short here, maybe not. I'll keep trying, using stops.
Also, this position effectively puts me into a long aluminum, short copper position. This is not a bad position to be in. The two metals compete in several major markets, and right now aluminum has a big price advantage. This will also work out over time.
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