Robbing with Copper (FCX,DIA,IWM,USO)

We’re not the dragon slayers we once used to be.

 

Or thought we were…

 

We still get the odd piece of correspondence that congratulates us for decapitating some carpetbagger or snake oil purveyor on Wall Street, but on the whole, our life has taken a quieter turn, and though age has something to do with it, it’s more likely a matter of changing temperament than anything else.

 

And that means we’re not as apt to write the hit pieces we once did.  Knowing how to write doesn’t mean you know how to think.  And even though we generally like to show we can do both, it wasn’t always the case.

 

One Last Swing

 

Today, however, we believe there should be a smear laid on a fella they call Shawn Langlois (surely of lapsed Acadian lineage), a writer for the Marketwatch group of copycats.

 

Shawnee seems to have a penchant for writing ‘hits’ as well – political hits, even though he works for an ostensibly finance related outfit.  Oh, well.  It’s all politics these days, we suppose.

Gymnast

In any event, of all the silly and errant things that have slipped from this youngster’s pen, none is so egregiously wrong as his ongoing bearishness, and his penchant for producing ‘once in a generation market indicators’ that are currently flashing Armageddon.

 

So when he’s not ridiculing Donald Trump, this mastermind stock selector will wow you with articles like these –

 

People are falling out of love with stocks in a big way

How stock investors could get hurt as the mean season begins

The ‘scariest chart out there’ looms over pivotal week for markets

Just one of these 6 things could trigger the next market slide

Get your affairs in order because this rare technical signal is flashing red

 

In the meantime, the markets are sitting within spitting distance of all-time highs.

 

Those who are interested can Google the little muggle’s foibles and read them for himself.  We’re here only to chide the scribbler himself, and to warn him about his penchant for writing hit pieces.  Silly ones.  Unprincipled and poorly argued that lean heavily on ridicule and a wit that’s more cutting than friendly.

 

In the end, Monsieur Langlois, ridicule boomerangs.  We’ve seen it happen many times.  So we’ve come to warn.  Make arguments.  Avoid slogans and presumptuousness.  Win people over with well a cogent presentation of the facts.

 

And remember you got off easy this time.

 

Making Trades

 

We’re going to close out a couple of initiatives this week, one for breakeven, one for more.

 

And it goes like this –

 

On the 18th of February in a letter called Final Phase of Bull: Hype and Greed, we urged you to buy the IWM June 100 PUT for $6.07 and sell the DIA June 158 PUT for $6.00.  Total debit on the trade was $0.07.

 

Today, the trade looks to be going nowhere.  It’s also close to expiry.  So instead of letting it drift toward a loss, we’re going to shut her down here as follows.

 

The IWM PUT is going for $0.13 and the DIA for $0.11.  Sell the former and buy back the latter for a net of $0.05.

 

Close enough.

 

Next up is the April 28th initiative from a letter called Oil Higher.  In that missive we recommended you consider buying the USO July 11.50 CALL for $0.70 and selling the USO July 11.00 PUT for $0.76.  Total credit on the trade was $0.06.

 

Today, the CALLs sell for $0.85 and the PUTs for $0.27.  Sell the former and buy back the latter, and you come away with net $0.64 on nothing spent.

 

New Trades! New Winnings!

 

Much of what happens in the market is discernible if longer term investment themes are well understood.  The wiggles and jiggles of the shorter term may or may not be so explicable in light of the broader picture, and sometimes we’re forced to say that the market went up simply because there were more buyers than sellers, or vice versa.  More than that, we don’t know, and trying to tie everyday movements to some proximate cause is, in most instances, just guessing.

 

But when a broad sector is trending in one direction and a particular component of that sector is moving against it – and the move persists for some months – then questions have to be asked.

 

Are we at the beginning of an intermediate or even secular change in trend?  Has the ‘decoupling’ occurred due to some obvious, fundamental imbalance?  Has a single component of the broader group gotten overbid or oversold to the point that a long term unwind is necessary to rebalance the position?

 

The following chart demonstrates just such a quandary in the commodities asset class.

dbc technical

The top price is the PowerShares Deutsche Bank Commodities Index Tracking Fund (NYSE:DBC).  Below it is the price for copper, the metal, over the same time frame.

 

And what accounts for the discrepancy?

 

In part, the rise in the overall index can be attributed to the gains in oil of late, alongside the precious metals and a few other smaller components of the index.

 

NYMEX crude futures gained some 50% in just the last four months.

 

Moreover, the dollar has been losing ground for all but the last month of that period, a development that should be helping commodities push higher in general.

nerd

And the truth of the matter is that we can’t say for sure what gives between copper and the rest of the commodities.

 

But we do know with almost Langloisian certainty that the divergence between the two will swiftly be dissolved as the market apprehends what appears to be a quasi-arbitrage opportunity.

 

And that’s the way we’re playing it.

 

We’ll use the stock (and not the options!) on DBC against one of the world’s foremost copper producers, Freeport MacMoRan Copper and Gold (NYSE:FCX) in a long/short trade that should produce many happy days ahead.

 

Freeport shares move exponentially with the price of copper, and that should help us close the gap all the quicker.

 

 

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Many happy returns,

 

Matt McAbby

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