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A Developing Trade in Copper Might Confirm Bearish View of Equities

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The copper market is offering signals about where price will go during the next two years and what the surrounding economy is likely to do during the same period.

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The price of copper has long been seen to correspond to the development of industry and infrastructure, because the metal is required for important steps in the creation of electrical power systems and the components of heavy industry. This prompts analysts to use it as a leading indicator of economic activity and stock markets. Even so, as with any commodity, the market for copper obeys its own logic of speculation and extremes of price into overbought and oversold territory. We believe the copper market is offering signals about where price will go during the next two years and what the surrounding economy is likely to do during the same period. This sets us up for a potential trade in the metal itself, and it also may provide evidence to confirm or contradict our overall bearish view of equity markets.



It's debatable whether copper price is a leading indicator of stock markets and economic activity, but it is at least a concurrent indicator. The chart below shows how, during the last 16 years, price has risen and fluctuated in conjunction with GDP statistics for key economic regions.



Also during the last 16 years, large swings in copper's price have often (but not always) presaged swings in stock markets. The growing divergence between copper, which is currently going sideways, and the S&P 500 Index (INDEXSP:.INX), which has been going up in 2012, suggests something needs to change to bring the two back in alignment.


No positions in stocks mentioned.
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