Things aren’t always what they seem. Take oil and copper stocks, for example.
They were on fire, fueled by gains in the actual commodities.
But investors got a ahead of themselves. The run-up was building on a rally late last year.
The
Energy Select Sector SPDR Fund
,
home to oil producers such as
and
was up 18% through early April, then hit a rough patch but still has a solid 8% gain. The fund hit a multiyear high of $98, pushed by WTI crude oil’s 12% rise.
Copper names are even bigger standouts. Through late May, miners
and Southern Copper rose 50% and 29%, respectively. The metal itself rose just over 30%.
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The price jumps for both copper and oil show a confidence that the global economy is growing—and will keep growing now that cental banks seem to be done raising interest rates.
And copper is getting another boost—from AI mania. The data centers that power the world’s adoption of artificial intelligence require more of the metal.
The commodities inched up again on Thursday. Both oil and copper gained roughly 1%, in part on comments by Fed Chair Jerome Powell that inflation is cooling enough to hold off on rate hikes.
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The commodities and the stocks tied to them usually move in sync. But not on Thursday. The oil stock ETF dropped a bit. So did Freeport-Mac. Southern Copper was flat.
Now, market veterans know one day can be a blip. This time, it isn’t.
The drops in the oil ETF and the copper stocks show that they had already reflected higher profits because of the double-digit gains in commodity prices. If the equities want to go higher, the commodities have to have big price increases.
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Let’s break down each separately.
Oil is at about $78 a barrel, and the oil ETF is at $89. But for just over the past year, this oil price has usually seen the ETF trading closer to $85. Any disappointment with the price of oil makes the stocks particularly vulnerable.
Of course, the stocks can gain if oil prices rise, but any upside has a ceiling. There’s plenty of proof. For about a decade, sellers have repeatedly come in to knock the shares lower when the oil fund reaches the mid-90s.
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The same goes for the copper stocks. Both just can’t seem to rise above key levels. Freeport trades at $48, below its multiyear peak of $54 hit earlier this year.
Just above $50 is “resistance,” or the level that sellers have come in—again for the past 10 years—to drive the shares lower. We recommended Freeport in the first half of last year, and after a large gain, it’s time to lighten up on the stock.
Southern Copper trades at $105, aggressively below its record high of $125 hit earlier this year. To crack that level, it will need another surge in the price of copper, not just a small gain.
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So, the takeaway: Sell.
Commodity stocks tend to have big gains, followed by big losses.
Yes, the economy is strong, but its rate of growth is slowing—and that’s typically not the time to buy commodity names.
After oil and copper stocks surged in the first two years of the expansion after the financial crisis, they were dead money—flat—for the next decade.
The good news: There’s still time to get out, and take a tidy profit.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
