Let's turn back the clock to early 2013...
The commodity super-cycle was topping out. A barrel of light crude cost $100. Gold had just dropped below $1,700 per ounce (and would soon go into freefall, traders would learn). Meanwhile, economic bellwether Dr. Copper was quickly slipping further away from its 2011 highs.
The price of copper had been dangerously close to crashing since the beginning of March 2013.
Here's a chart I annotated just as the breakdown started to develop:
"Now that its multiyear uptrend is in the rearview, we're in store for lower prices," I wrote at the time. "Huge inventory surpluses have helped push copper lower. In London, copper stockpiles rose to 543,925 tons, the highest level in 3 years. In Shanghai, stockpiles climbed to 231,872 tons, the highest level recorded since 2003."
Of course, we now know how the beginnings of this bear market played out. Over the next few years, oil dropped more than 60% from its highs. Gold futures declined more than 35%. Poor ol’ copper dropped 45%.
When the dust cleared, copper was just another victim of the great commodity unwind. A lot of folks pointed to copper’s reputation as a leading economic barometer since the metal is found in virtually all electronics and countless other industries. But this relationship hadn't held true -- even in 2013. Copper had drifted lower since 2011 while stocks found new highs. A new bear market had begun.
Warning: Seniors In BIG Trouble
Now, after years of pain, the market is breathing new life into the copper trade.
Sagging economies in China and Europe are no longer weighing heavy on Dr. Copper. In fact, a worldwide economic recovery is now helping to boost materials and mining shares. Look no further than Caterpillar Inc. (NYSE: CAT). The firm's revenue is up almost $1 billion compared to last year. The company crushed estimates and raised its full-year forecast for the second time, Reuters notes, thanks to improving demand in China and increasing mining activity. Shares jumped nearly 6% yesterday.
Not to be outdone, our own copper comeback play Freeport-McMoRan Inc. (NYSE: FCX) ripped higher yesterday after reporting second-quarter profits. Heck, FCX didn't even beat earnings expectations. But solid revenue and upbeat guidance was enough to spike the stock. Shares rocketed by nearly 15% on the day.
We didn't need to wait for earnings or the fake news reports to see Freeport's potential. When we shut out the noise, it's easy to see Dr. Copper's impressive turnaround move that started to unfold earlier this month. After years of pain and suffering, a sustainable rally is in the works.
As we noted last week, the post-election rally back in November was the spark that helped copper snap its downtrend. After seven months of choppy consolidation, copper popped above its March highs and is now posting a huge breakout.
I like to say that buying FCX is like buying a call option on copper without the high commission. This trade certainly proved how explosive it can be with yesterday’s move!
We'll continue to watch FCX closely as it digests this double-digit swing. I still think FCX has the potential to scream back toward its February highs above $16, which would hand you fast 20% gains. If momentum traders continue to pile into unloved materials and mining stocks like this one, we could be in for a wild ride…
This article originally appeared on Daily Reckoning.