Canary On The Crude Oil Rig

First, let's start with Copper. This has been one of the key risk assets that have led the way off the March lows, but momentum is diverging and prices are taking a bit too long to break out from this bull flag for my liking. If this flag resolves lower instead of higher, that'd likely put pressure on risk assets in the near-term.

Click on the chart to enlarge view.

And Crude Oil is just as important in my opinion. In early June prices reached former support near 43 and the downward-sloping 200-day moving average as momentum diverged. They've been working through that overhead supply over time since then, but are now potentially resolving to the downside.

The weak action in Energy stocks and other Crude alternatives and correlated products like Ethanol and Naphtha has been less than encouraging. Ethanol tried to break out and failed, while Naphtha continues to trade in-line with Crude Oil prices.

And if you want to look at some less funky stuff, then check out Gasoline which is already leading to the downside. Based on these intermarket signals, a move lower in Crude Oil looks like the higher probability outcome to me...especially since it couldn't rally with the wind at its back over the last two months.

So if these two important risk assets cool off and begin correcting in the near-term, what does that mean for stocks and other risk-appetite barometers? Well, they'll likely be under pressure in that scenario.

And from an Equity-market perspective, we're already kind of seeing that. There have been many short-term failed breakouts in areas like the German DAX, Nikkei 225, Nifty 50, etc.  over the last two weeks. Many of these global indexes are sitting at or near flat 200-day moving averages, so maybe our expectation should be for a choppy environment where things reset and give stocks a strong foundation to work higher from.

I'd also note that stocks can't rally today on the back of the four biggest tech giants "beating earnings" says a lot. The rotation we were looking for is just not happening yet.

When I posed this scenario to our team slack channel, our intern Louis asked a great question. He said, "That would put a damper on the whole Emerging Markets and Latin America rotation, right?"

My reply was that it really comes down to the timeframe you're discussing. In the near-term, it absolutely will. What we don't know is if near-term weakness is just a pause in trend before continuing higher, or if it's the start of something more.

The point being, the weight of the evidence has not shifted enough to throw out the intermediate/long-term bull thesis for risk assets, but in the next few weeks, the potential for a pullback in risk assets looks elevated.

How this action in Copper, Crude Oil, and related markets plays out in the coming weeks will be telling and we want to be watching closely how these corrections develop from a price retracement and timing perspective.

As always, thanks for reading and please let us know if you have any questions!

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