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S&P, Volatility, and Copper Prices

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Are copper prices signalling a top in the S&P?

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Another underlying asset that I monitor closely is copper futures. Generally speaking, if copper futures are rallying, economic conditions tend to be strong. The opposite can be said when copper futures are under selling pressure. Recently copper-futures prices have been trading in a relatively tight trading range, but the longer-term weekly chart shown below demonstrates that should prices start to sell off, a major selloff could transpire.

Copper Futures Weekly Chart



As shown above, there is a monstrously large head and shoulders pattern (bearish) that goes back to early 2010 that has formed on the weekly chart. Should the neckline of this pattern get taken out on a weekly close, the selling pressure that could transpire could be devastating regarding the price of copper.

However, a major selloff in copper would also indicate that economic conditions were weakening globally. If copper triggers this bearish pattern, it would likely not be long before other risk assets followed suit.

In addition to the possibility that major selling pressure could await copper should that pattern trigger, another macroeconomic data point would argue that economic conditions are already starting to contract. The chart shown below, courtesy of Bloomberg, illustrates the amount of waste hauled by railroad cars and the implicit correlation to US gross domestic product.

Waste Railcar Loads Versus GDP Chart



Recently Zerohedge.com posited an article that featured this chart. The article and the accompanying chart demonstrate that as more products are produced, additional waste can be expected. As shown above, the amount of waste being produced and hauled by railcar has fallen off a cliff and should longer-term correlations remain intact a contraction in US GDP is likely not far away.

There are a multitude of other topping triggers that I follow which are all screaming that a major intermediate and possibly even a longer-term top is nearby. However, at the moment the price action in the S&P 500 Index is arguing otherwise.

Picking tops and bottoms in advance is extremely difficult and generally foolhardy, however when multiple triggers are going off regarding a possible type, I pay close attention to price action. While I will not go as far as to say where specifically a top in the S&P 500 Index will form, I believe that a top is forthcoming and could even occur in the next two to three weeks.

Price is never wrong, and eventually I suspect that price will tell us what we wish to know. For now, I am going into the next few weeks with caution regarding the upside in risk assets. However, it is important to point out that I am not looking to get short risk assets either.

My research indicates that a major inflection point is coming and it could coincide with the Federal Reserve's Jackson Hole summit. It could coincide with an event that we are unaware of as well. At the moment risk in either direction seems high, and caution -- regardless of directional bias -- should be exercised. The next few weeks should tell the ultimate tale.

Happy trading!

Editor's Note: Chris Vermeulen offers more content at his sites, TheGoldAndOilGuy.com and Traders Video Playbook.

No positions in stocks mentioned.

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.

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