Let’s get into why Copper needs to be on your radar.
First, we’ve got a chart of Emerging Markets ETF (EEM) and Copper Futures, which look almost exactly alike over the last two decades. Both are approaching their 2016 lows after sharp declines, so if they can start to gain their footing their that would be an overall positive for Emerging Market stocks. If, however, they fail to catch a bid at these levels then that’s a major issue for Equities as an asset class.
Click on chart to enlarge view.
The other thing we’re watching for is a divergence between Emerging Market and US stocks, which remain the clear leader on a relative basis.
In late 2018 the positive divergence between these two markets was a reason why we turned so bullish and remained so well into 2019. While the S&P 500 was making lower lows in December 2018, Emerging Market stocks were making a higher low and leading to the upside. This signaled improving risk appetite among market participants and suggested that the rally in Equities had legs…because if the world was ending, nobody would be buying riskier Emerging Market stocks, they’d be hiding out in Developed Market Mega-Cap stocks.
This year we got the opposite signal in January/February when Emerging Market stocks put in a lower high as US stocks made a higher high. This showed waning risk appetite and ended with US stocks catching down aggressively to those around the world, which had peaked in mid-January.
We’re looking for the same signal we saw in December 2018 to signal risk appetite is coming back into the market. Copper and Emerging Market stocks stabilizing above their 2016 lows would be a great start to that thesis, so we’re watching them very closely.
Bonus Chart: We’ve been pointing to India’s underperformance relative to its peers for a while and that relationship recently accelerated to nearly 2-year lows. The inability of the Nifty 50 ETF to break decisively above its 2015-2016 highs relative to the Emerging Markets ETF and momentum remaining in a bearish regime were big warning signs.
Longer-term India remains in a messy, wide range relative to its peers. Until it breaks in one direction or another we shouldn’t expect any sort of multi-year trend of outperformance/underperformance. In the short and intermediate-term however, continued relative weakness looks likely.
Bottom Line: Copper and Emerging Market stocks will set the overall tone for Equities over the intermediate/long-term, so keep an eye on them!
Thanks for reading and let us know if you have any questions!