Crude, Copper And The S&P500

December 1, 2014

This topic is really an extension of last week’s note, but one that will perhaps make more of an impression now considering the truly bearish action in crude and copper last week.

Crude oil closed down 13.7% on the week after OPEC decided to keep its production ceiling the same for a whopping 38.6% fall from its June peak to November trough. Of true importance here is the fact that crude oil broke below critical long-term support that probably ends any debate about whether its multi-year neutral sideways range could produce another swing up.

In fact, it was crude’s springtime rebuff by resistance that caused me to shift my view on crude oil to neutral from bullish on June 1 followed by trading action that caused me to shift my view to bearish-to-neutral on July 1 meaning that crude was positioned bearishly but within a wide trading range.

Well that crude oil range finally broke last Friday to the downside, but this trading action was not an isolated island within the commodity complex.

copper chart

Putting aside the corrections in corn, gold and silver that all began to take serious shape in 2013, copper broke below hugely important long-term support last week with its charts now suggesting that some of my very low targets on copper set in 2011 may be hit.

The importance of copper’s technical breakdown cannot and should not be underestimated by anyone and particularly in the shadow of crude’s correction.

It may be tempting to think that crude’s crash is all about the dollar, the end of U.S. QE and the OPEC decision, but “Dr. Copper’s” current 38.2% decline from its 2011 peak supports the idea that it may reflect slowing global growth and thus demand as well.

Should this prove true, it would seem this sort of slowing global growth would hit the corporate profit outlook that at some point and eventually stocks too.

But irrespective of what the crude and copper correction reflects on a fundamental basis, history tells us very clearly that it is unlikely to be constructive for the equity markets.

crude oil and copper correction

In fact, the long-term monthly chart above very plainly suggests that the S&P 500 is likely to join in on the crude and copper correction and probably soon.

It is for this reason that it seems well worth considering the connection between crude, copper and the S&P500.

As always, thank you for taking the time to read this week’s piece.



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