Copper Short Working Well So Far

This mornrning’s jobs report showed that more jobs were created in the U.S. last month than analysts had expected.

The bullish report certainly moved markets… pushing U.S. stock indices higher, Treasury bonds lower, and sending commodity prices into a tailspin.

Fifteen minutes after stock markets opened, gold futures were down 1.3%… silver was down 3.2%… and copper took the worst beating, losing 3.5%.

The horrible performance of copper shouldn’t have surprised you. Here’s a chart I’ve shared before, showing weak copper prices that can’t muster the strength to overcome the $3.30 to $3.40 per pound level.

See larger image

Most recently, I wrote about trouble facing the copper market. A structured derivative product popular in Hong Kong has allowed speculators to take massive positions betting on a strengthening Chinese yuan. Huge positions have been built over the past few years.

Yet, many of those positions aren’t financed with cash. Instead, stores of copper are being used as collateral to secure letters of credit from Chinese banks. And thanks to rehypothecation, there’s not enough copper collateral to back the full extent of the losses the Chinese banks stand to take.

As the situation gets worse, these trades will be forced to unwind. That could cause yet another precipitous drop in copper prices.

Last Friday, I recommended betting against Southernrn Copper Corp. (NYSE: SCCO). And so far, that’s been a good bet. Here’s a chart of the stock:

See larger image

SCCO closed at $30.51 a share last Friday. The average of this week’s price range is about $30.72, so let’s assume an average short entry price of $30.60 if you followed my advice and shorted shares of SCCO last week.

As of lunchtime today, SCCO shares traded as low as $28.94… giving SCCO shorts an open profit of a little more than 5%.

That’s not bad for a position that’s only been open a week. Still, I think copper and SCCO have a lot further to fall. Assuming SCCO breaks below $29 over the next week or two, the next stop on the way down will be in the $25 to $26 range.

Stay the course for now.