From the desk of Steve Strazza @Sstrazza
Thank you to everyone who responded to this week’s Mystery Chart.
We had a few buyers but most of you were selling at this logical level of interest or exercising patience to see how prices react here. A few responses also pointed out that this likely isn’t the best time to enter on the long side but are anticipating an eventual breakout and would be buyers if and when we get it.
This is the same camp we’d fall into and we provide details why in the original Mystery Chart post. With that as our backdrop, let’s look at the chart.
This is a ratio chart of Copper Futures relative to their benchmark, the CRB Commodities Index, going back over ten years.
Click on the chart to enlarge view.
The chart shows Copper in a structural uptrend relative to Commodities. After a few years of consolidation, Copper began outperforming again late last year, with its relative strength really accelerating during the recent selloff in stocks.
We are also keeping a close eye on Copper on an absolute basis right now as we believe it is one of the last charts holding onto critical support and is yet to join our “disaster scenario” chart list. Here is what JC had to say about it in a post from yesterday:
“From an ‘end of the world’ scenario, I continue to point to Copper flirting with really critical levels. If we’re holding below 2.45 in Copper, then this is completely broken and I would expect the selling pressure in stocks should continue.”
If you’re wondering why JC thinks weakness in Copper would be a negative for stocks, just take a look at the chart below.
This is the same ratio chart as above but with the S&P 500 ($SPX) overlaid in order to show the strong historical relationship the two have had. During the Dot-Com Bubble and Financial Crisis, Copper severely underperformed as equities crashed and actually acted as a pretty good leading indicator.
This brings us to today, where stocks have officially entered bear market territory for the first time since 2008, yet Copper is testing all-time highs on a relative basis. This is quite an extreme divergence as new relative highs in Copper are simply not a characteristic of bear markets.
Due to this broad equity market weakness, we believe the higher likelihood outcome is that Copper fails to hold its key 2.45 level on an absolute basis and this ratio fails at its former highs of 0.174 and catches down to the recent move in stocks.
Another important intermarket ratio is Copper/Gold, which we like to use for insight on interest rates along with a handful of others which we detailed in yesterday’s post, “What Intermarket Ratios Are Saying About Rates.”
That post really isn’t complete without discussing the Copper/Gold ratio, so here it is.
Similar to the ratios we discussed in yesterday’s post, Copper/Gold is testing crucial potential support at its record lows from 2009, which occurred just prior to significant bottoms in yields and equities alike. For now, we can only wait for more data to come in to determine which direction this is likely to resolve.
We’ll be watching closely to see if this ratio breaks down and confirms the recent collapse in yields or reverses higher from here and confirms the bullish momentum divergence that’s formed at its key prior lows.
The bottom line is that we are always watching good old Dr. Copper as it provides excellent signals for both equity and bond markets alike.