wmeubank@ocp.kcmo.com
THE HIGHTOWER REPORT
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(October 8, 1997) METALS: COPPER–Copper attempted to make a bottom early last week, but the weight of bearish fundamentals might be too much for anything other than temporary short covering. With the world's largest economy (U.S.) at best showing moderating economic activity at the same time the world's largest developing economy (China) as well as other Asian economies are showing significant signs of faltering, the hope for a return to strong demand is unlikely. Expectations were that China would import 300,000 to 400,000 tons. At mid-year China's imports were almost insignificant! The fact that prices shot sharply higher away from the 90.00 level on the weekly charts only to recover quickly highlights the markets trouble finding true value in copper prices. The factors that fueled copper higher during the last two years have changed, leaving the market in a slow downtrend. After recovering most of the Sumimoto debacle where prices fell sharply from 120 to the mid-80's, the market attempted to recover, only to find out that the anxiety of supply had been eliminated.
Furthermore, copper production continues unabated, which is something we think the market hasn't fully priced in. The major problem with pressing copper prices at current levels is that the market can look far enough forward to economic rebound in Europe. In the meantime, we would expect LME copper stocks to surpass the 1996 highs above 355,000 tonnes in the coming weeks. As in the grain markets, prices tend to make lows around the period of highest supply. Comparing the daily LME stocks chart to long-term historical price charts, it's easy to project copper prices falling to the 1996 lows at 82.000 to 84.00 because that's where prices headed the last time LME stocks rose above 350,000 tons. At this point we are not sure if actual arbitrage is taking place between Shanghai and London, meaning prices in China are forcing copper to flow toward London. From a timing perspective March copper seems to exhibit the weakest seasonal period of the year in the month of October.
Therefore, we would expect copper to culminate a long- term bottom formation before the end of October. Traders should be selling rallies with objectives of 84.00 basis the nearby. Over the past two weeks, the markets denial of increasing stocks should create an opportunity to get short into the seasonal for the final leg down in this bear market. Toward the end of October traders should begin to run buy stops on shorts and take any consecutive daily increases in LME stocks seriously.
The commodity market's function is to anticipate future economic developments and we think copper prices will finish pricing a moderating economy with a consolidation low similar to 1996.
SUGGESTED TRADING STRATEGY–Sell December copper at 99.10 with an initial objective of 91.90 and then again at 85.90. Risk the trade 102.80.
For daily market updates of the Hightower Report of Comprehensive Commodity Research, call 900-225-2200, extension 5 for Metals Forecast. The cost per minute is $1.33.
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