Is Copper Predicting a Bear Market for Stocks?
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.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.