Hey trader,
Alcoa, the aluminum maker, gapped down 5% on Thursday. Copper got pummeled right along with it, sending a copper demand signal I can’t ignore.
Metals like these are raw materials. Factories and builders buy them to make things, so their prices follow demand.
When copper falls this hard, I read it as buyers backing away.
Housing stocks moved the other way. Bond prices rallied, which pushes interest rates lower.
Homebuilders like Toll Brothers bounced on hopes of cheaper mortgages.
I don’t trust that bounce. Yields sit only about 0.2 off their highs, too little to change how people borrow.
The copper demand signal settles it, because its price shows whether demand is real.
Right now, copper says demand is shrinking while borrowing stays expensive. I call that mix stagflation.
It’s why I’ve spent three months telling the room to own staples and utilities, my safety plan. It’s also why I’m lining up fades in homebuilders.
Here are the two copper levels I’m watching, and what each one would tell me.
Why I Trust The Copper Demand Signal
Copper goes wherever things are being built. That’s why I lean on Dr. Copper to tell me if demand is real.
On Thursday, the copper demand signal was clear. Copper was falling, and falling quickly.
Gold has been unwinding too, so it’s tempting to blame the selloff on gold.
I told the room copper’s drop runs deeper. Demand for base materials is getting destroyed.
Alcoa backed that up. It broke out, failed and gapped down to trade about 5% lower.
That’s more confirmation of the copper demand signal I’ve been flagging for two weeks.
The Two Copper Levels I’m Watching
I don’t try to guess a bottom in copper. I watch two levels that show how strong the copper demand signal gets.
The first sits at 6.34. If copper clears it, I think we go to $6.
The second level is $6 itself. If copper clears $6, I wouldn’t be surprised to see it repeat its last pattern twice over the next month.
Here’s the math on that. The last swing ran from 6.90 to 6.40, roughly 50 cents.
Two more swings that size take copper from 6.40 down to 5.40. I’m looking for that in November.
There’s nothing magic in it. I define the trend and find where my levels line up with it.
Why The Bond Rally Doesn’t Change My Mind
Thursday’s bond rally lit up the homebuilders. Toll Brothers had a big bounce, and Lennar had a huge day.
I don’t read that as a recovery. Rising bonds can just mean money running for safety and a risk-free return.
For housing, I watch ZN, the 10-year Treasury note futures. Mortgages key off the 7-year and 10-year notes, not the 30-year bond.
I need ZN to close above 106.12. Even then, I think it only reaches 106.30, and that doesn’t stop the downtrend.
Yields have come off their highs by only about 0.2. Lower rates won’t suddenly make people go buy cars or borrow money.
A small dip in rates doesn’t fix a weak copper demand signal.
I’m looking to fade Toll Brothers and D.R. Horton. Fading means trading against a move I expect to reverse.
I won’t short Lennar, though. It has a better fundamental situation.
I haven’t taken these fades yet, and I’m watching for entries. I think homebuilders could be the best next trade in this move.
Run The Copper Demand Signal Check Before You Buy
You can add this to your routine before your next trade:
- Pull up copper first. Before you buy anything tied to spending or building, check the copper demand signal against its levels.
- Watch the right bond. For housing trades, follow the 10-year note, and don’t treat one up day in bonds as a turn.
- Lean on the safety plan. When the copper demand signal turns weak, look at staples and utilities before cyclical names.
The safety plan is already working. XLP has pushed past its six-month high, and I’m looking for a test of 90.
XLU keeps printing higher highs and higher lows. NextEra was up 3% on Thursday.
I still judge every name on its own chart. Just because it’s a utility doesn’t mean it’s going to do as well.
Before you buy a rally in anything tied to spending, check the copper demand signal.
That’s my line, and it doesn’t have to be yours.
Copper’s next test could come at 6.34 or $6. I’d rather you see how I’m reading it live than hear about it after the move.
Check the copper demand signal first, then decide whether a rally has buyers behind it.
Blake Young
Senior Market Strategist, TheoTRADE
