Is Copper Predicting a Bear Market for Stocks?

By Jason Goepfert  SEP 29, 2011 11:50 AM

Since copper is used in so many industrial applications, many believe a dramatic fall in price reflects an economic slowdown, and by extension, a likely future decline in stock prices.

 


A popular topic lately has been the fact that copper has fallen into bear market territory. At least, that's true if you subscribe to the idea that a bear market equates to a 20% fall from a recent high.

Since copper is used in so many industrial applications, many believe that a dramatic fall in copper prices reflects an economic slowdown, and by extension, a likely future decline in stock prices.

I've discussed "Dr. Copper" several times in the past, and the correlation between extremes in copper prices and future returns in stock prices is poor. It's just not usually a very good predictor.

But let's go back over the past 25 years for which futures prices are available and look at how the S&P 500 fared after other times copper fell rapidly into a bear market. By this, we're looking for a decline of 20% or more within a two-month period, when its highest point was very near a 52-week high.

Out of the six instances, only one led to an imminent and dramatic fall in stock prices. The occurrence in November 2007 did ultimately lead to a bear market in stocks, though the S&P rallied fairly strongly for a month or so beforehand.

The other occurrences were not so bearish. In fact, they were outright bullish for the S&P. By six months later, the index was up by more than +12% each time. For whatever reason, perhaps this latest bear market in copper will be more predictive of a future failure in stocks...but its history has not been consistent.

Below are charts of each of the occurrences noted above.





No positions in stocks mentioned.

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