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Copper Pause Signaling October Correction?


While copper strength has been a net positive, a pause in strength may be here and serve as a warning to risk assets that turbulence is about to kick in.


Whenever you find yourself on the side of the majority, it is time to pause and reflect.
-- Mark Twain

In my latest Lead-Lag Report here on Minyanville, I noted that the most recent period of market strength appears to have little confirmation based on various intermarket trends. The wrong sectors are outperforming, as the bear trade returns in the face of what still appears to be a resilient market. I very much maintain that following the Summer Surprise, the Fall Catalyst of 2012 will be when every headline in the world reads "Dow Hits New All Time Highs." But in the here and now, the price action looks more and more sloppy internally. The odds of a correction based on this are rising, but the magnitude of such a decline remains unclear. Our ATAC models used for managing our mutual fund and separate accounts remain skeptical on the most recent price action in stocks, and thus far remain in defense mode positioning into bonds.

One area that could be providing a bit of a tell is Dr. Copper. Take a look below at the price ratio of the iPath Dow Jones-UBS Copper Subindex ETN (NYSEARCA:JJC) relative to the S&P 500 (NYSEARCA:IVV). As a reminder, a rising price ratio means the numerator/JJC is outperforming (up more/down less) the denominator. A falling ratio means the opposite.

There are several things worth noting here. Given the role copper has in global economic growth, it should make complete sense that the industrial metal got decimated as the deflation pulse of last year took hold. Strength kicked back around mid-August, as the European Central Bank and Federal Reserve announced "unlimited" stimulus, and as hope grew for China to join the stimulus party.

I have drawn in a resistance line to show where we are now. While the trend remains up, there is a possibility here that strength in copper abates relative to equities should the ratio fail to break above the 0.34 level definitively. A failure to do so combined with further weakness in small-caps (NYSEARCA:IWM), alongside continued strength in high dividend/low beta sectors, may prove to be a strong warning of a period of turbulence coming in equities.

We'll find out soon enough...

Twitter: @pensionpartners
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No positions in stocks mentioned.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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