JJCTF: Time To Get Out (JJCTF)


Back in June, we expressed our very bullish thesis on the iPath DJ-UBS Copper Total Return Subindex ETN (JJCTF) after the violent sell-off in the first half of the year. To wit:

We identified correctly the positive turn in the fundamentals amid a positive macro backdrop thanks to a substantial dose of stimulus delivered by major economies. Importantly, we think that the rally in JJCTF has been mainly driven by the V-shaped recovery in China, which consumes more than half of refined copper supply annually.

About JJCTF

For investors seeking exposure to the fluctuations of copper prices, the iPath DJ-UBS Copper Total Return Subindex ETN is an interesting investment vehicle.

The fund summary for JJCTF is as follows:

The iPath® Bloomberg Copper Subindex Total ReturnSM ETN is designed to provide exposure to the Bloomberg Copper Subindex Total ReturnSM (the “Index”). The Index reflects the returns that are potentially available through an unleveraged investment in the futures contracts on copper.

Its expense ratio is 0.75% per annum.

JJCTF tracks copper prices well, as the chart comparing the ETN and the Index illustrates below:

Source: iPath

We think it is now time to get out

While our fundamental assessment of the global refined copper market is still optimistic (we see a rebalancing because the tightness in China should continue to more than offset the looseness in the rest of the world), we think that JJCTF is vulnerable to a potential sharp sell-off in the near term. Its vulnerability is owing to the excessive net long positioning among money managers in the copper futures market, which significantly constrains the bullish dry bullish powder level.

Let’s take a closer look.

First, money managers have boosted substantially their net long positions in CME copper since March, according to the CFTC. While they were notably net short during the height of the COVID-19 crisis, they are now very long, holding 91,578 contracts as of October 20.

Source: CFTC, Orchid Research

To better visualize the heavily long speculative positioning in the copper futures market and the implications for copper prices, we present a scatter plot, showing the net long spec positioning on the x-axis and the CME copper price on the y-axis. The dark blue dots represent the last 52 weeks.

Source: CFTC, Orchid Research

Our analysis: Two things can be highlighted. First, the current spec positioning is very bullish judging by historical standards (the red dot is at the far right). Second, the CME copper price looks too expensive based on the relationship between positioning and prices (the red dot is above our regression line).

Finally, we seek to quantify the level of dry powder among money managers to identify whether speculators are more likely to unwind or rebuild positioning (long or short). To do so, we distinguish money managers that hold long positions (MM longs) and money managers that hold short positions (MM shorts). For each category, we identify the number of traders reported by the CFTC. We plot this information in the following visualization.

Source: CFTC, Orchid Research

Our analysis: While the number of money managers holding long positions (MM longs) is very high (close to 100), the number of money managers holding short positions (MM shorts) is very low (less than 2020). Although this is not surprising, considering 1) the bullish sentiment toward CME copper and 2) the high CME copper price environment, this clearly shows that the “long copper” trade has become overcrowded. In case of a negative turn in macro sentiment, reflationary trades (like long copper) could be abruptly unwound. Given the constrained bullish dry powder and the substantial bearish dry powder, we think that the CME copper price could come under heavy pressure.

Conclusion

While we have enjoyed a great upside by being long JJCTF since June, we are now in the process of taking some profit due to the very limited dry powder in the market. Technical analysis may prove useful to identify the best “exit” point. In this regard, we are looking at the MACD cross to have confirmation that the momentum is turning negatively. We also pay attention to the alignment of moving averages and the price vs the different moving averages. A sell-off in JJCTF would create a long-term bullish opportunity because our fundamental analysis shows that the global refined copper market may record a deficit next year after being balanced this year.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Our research has not been prepared in accordance with the legal requirements designed to promote the independence of investment research. Therefore, this material cannot be considered as investment research, a research recommendation, nor a personal recommendation or advice, for regulatory purposes.

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