You often hear people call it, “Dr. Copper”. They say the metal has a Ph.D. in economics because of its ability to predict turning points in the global economy. I’m not sure about all that, but I do see a strong correlation between it and Emerging Market stocks. Today we’re taking a look at these two assets and why Copper’s next move is likely to coincide with the direction of Emerging Market stocks.
Here is a chart of the Emerging Markets Index Fund $EEM at the top going back 13 years. Plotted below it are Copper Futures. Notice how they pretty much look exactly the same:
I think it’s a pretty good bet to make here that whatever Copper does, EM stocks will follow. Here is a closer look at Copper. The question is simple: Is this a breakout from the 5-6 year downtrend on its way to retest those former highs from 2006, 2008 and 2011 above 4? Or was this just a mean reversion and counter-trend rally within an ongoing downtrend?
Based on the weight-of-the-evidence, this level around 3 is the one we’re watching. If Copper is unable to hold this level, it would likely mean that Emerging Market stocks have completed this 2-year rally and its now time to underperform again.
I’m not convinced that this is a bearish picture, yet. I think the recent relative strength in Emerging Market stocks is suggesting that both of these are heading higher: Copper and EM stocks. If Copper is below 3, it definitely invalidates any bullish thesis for either of these, so I think it’s important to watch this level as we enter the Second Quarter.
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