Rallying Copper Stocks Await Bullish Analyst Revisions

While many traders are long on copper, there's plenty of pessimism surrounding VALE and SCCO

Jan 10, 2018 at 3:00 PM
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Considering how well copper futures have performed in recent months, it may not be too surprising that long copper positions are at a record high, based on the most recent Commitment of Traders (CoT) report. Meanwhile, data from Schaeffer's Senior Quantitative Analyst Rocky White shows that 95% of the stocks in our Industrial Metals and Mining sector are trading above their 80-day moving average, yet this group sports just 50% "buy" ratings from the analyst community -- suggesting they've overdue for upbeat attention from Wall Street. Two names in particular that may be of interest for options traders are Vale SA (ADR) (NYSE:VALE) and Southern Copper Corp (NYSE:SCCO).

Volatility Expectations Muted On VALE and SCCO

VALE shares just yesterday touched a three-year high of $13.42, and were last seen trading at $13.16. The security has surged over 41% in the past six months alone, yet five of the 11 analysts covering the equity say it's a "hold" or worse. Plus, put open interest more than doubles call open interest among options set to expire within three months, hinting at bearish expectations from options traders.

Speaking of near-term options, now's a great time to scoop up some on Vale. For instance, it has a Schaeffer's Volatility Index (SVI) of 32%, which ranks just 9 percentage points from an annual low. In other words, volatility premium is much lower than normal for the security right now.

There have been four times since 2008 in which VALE stock was trading near a 52-week high and simultaneously sported an SVI in the bottom 10% of its annual range. After those signals, the copper stock went on to rally 6.61%, on average, in the subsequent month.

Turning to SCCO, the shares have gained an impressive 36.3% in the past six months to trade at $49.61, and earlier today tapped a record high of $49.86. Shockingly, just one of the six covering brokerage firms recommends buying the stock, and short interest represents more than 10% of the total float -- though these bearish bets fell by 9% over the past two reporting periods.

So like VALE, Southern Copper could see some of this pessimism unwind, which would likely result in even higher highs. Plus, its SVI of 22% also ranks in the 9th percentile of its 52-week range, showing it's a good time to target near-term options contracts.

 

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