Will Copper Or The S&P500 Be Right?
A curious thing has started to happen this year and that is the rather large divergence between copper and the S&P500.
Copper - or Dr. Copper - is seen as a barometer of global economic activity as an industrial metal used in everything from construction to electronics. Its rather dramatic slide this year - most recently on weak China data - would suggest that real world economic activity is faltering.
The S&P, on the other hand, has found new record highs in recent days after initially following copper's bearish lead back in late January and February. Apparently, investors are not too worried about the effect of a potential global slowdown on the corporate profit outlook.
Or - maybe investors have gotten beyond complacent under the dangerous guidance of the Fed's-Got-Your-Back-No-Matter-What-Happens trade and a temporary illusion at best but one that may have robbed many investors to evaluate the potential risks of going long stocks relative to the seemingly infinite rewards.
This is worrisome considering that copper has been flashing red for far longer than a few weeks as shown in the 3-year weekly chart below.
Both copper and the S&P traded up into the volatility of 2011 in a similar fashion - and presumably on the back of QE2 - only to part ways after Operation Twist was initiated.
Now the case can be made - and certainly I made it around gold at that time - that this was the Fed's goal: steer investors into stocks at the expense of other asset classes.
But the problem with that argument, in my view, around copper is the idea that the copper is one of the "growthiest" risk assets out there as a measure of economic growth not just in the U.S. but also in the emerging markets, and thus its 3 year divergence with the S&P seems worth noting.
This is particularly true considering that copper was barely revived by QE3 and the Fed's promise for infinite risk asset support and something that has inspired the S&P to move up more than 40%.
It seems to me, then, that copper's lack of a real response to QE3 reflected global growth concerns at that time with some of the current data supporting this possibility especially considering that copper was not predicting this winter's weather a year ago.
Irrespective of what copper's current flirtation with multi-year lows reflects, it is the long-term monthly chart of copper and the S&P that suggests some trouble - some very bearish trouble - may be ahead for both copper and the S&P.
Clearly copper has been reversing its 2009 euphoria in waves for 4 years now with 2011's peak presenting as the ultimate trap considering that copper's technicals remain very bearish and the reason for my long-term bearish call on copper.
What is to be seen, however, is whether, when and how copper and the S&P converge again.
Relative to the first question, it seems very likely that this potential copper and S&P reconvergence is only a matter of time. Relative to the second, well... frankly I am surprised this risk asset silo reconnection has not happened already, but the S&P's 2013 rally truly reflects a market movement going longer and further than most would have anticipated. And lastly on how copper and the S&P will reconnect, you've got to know I think it will be down by now.
In turn, it seems likely that copper will turn out to be "right" about whether 2013 was a false initial reaction in the S&P and one that many investors may come to wish they had ignored.
As always, thank you for taking the time to catch up on my thinking.
Courtesy of http://www.peaktheories.com