“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)

"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput

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Friday, March 1, 2013

A Tale of Two Cities

No, it is not the classic by Charles Dickens set against the backdrop of the French Revolution; rather, it is the price charts detailing the nature of the economy as told by two camps.

The first is the S&P 500 as it powers higher and shrugs off Italian election results, sequestration fears and moribond employment choosing instead to focus on the data detailing growth, albeit however minute that might be.

The second is the copper market, afffectionately referred to as "Dr. Copper" for its uncanny ability to project investor sentiment towards overall economic growth.

These two apparent lookalikes, Darnay and Carton, have recently taken to going their own separate ways unlike that of the novel wherein they find their paths increasingly intertwined.

Take a close look at the following two different colored lines. The blue line is the closing price of the S&P 500 (emini) while the red one is the red metal, Dr. Copper.

Don't worry about the actual price level of either one; look only at the DIRECTION of price movement for both lines. I have only gone back to June of last year with this for analysis purposes but wish to point out how the two lines are basically in sync until February of this year. Notice that they tend to both rise and fall together. Spikes in the S&P were matched by spikes in Copper with dips in the S&P coinciding with dips in the price of Copper.

Along about the beginning of this year, the two markets began to diverge a bit in the sense that while the general trend in copper was up, it began moving lower during periods in which the S&P continued to move higher. Copper would recover from the dip and move higher again, seemingly catching up with the S&P but right around the beginning of the second week of February, these two companions apparently parted company and did so rather glaringly.

Can you see how sharp the fall in copper has been over the last month? Can you also see that while the S&P has briefly dipped following copper lower since the middle of February, it then rebounded higher as copper continued to sink? The divergence is especially pronounced over the last week or so.

Here is the issue - both of these markets should not be both true.  In other words, if Copper is a predictor, and a generally reliable one, of expected economic activity in the future, then one has to question why the equity markets are seemingly no longer paying attention to its fall. We are constantly being told by the pundits that the global economy is recovering and growth is expected to continue, even if it is at a rather lackluster rate. Yet, here we have copper falling lower giving us a clear signal that growth is expected to slacken.

Which one of these forward looking indicators is true?

I should also note here that the large macro funds ( the hedge funds ) are now playing copper from the short side. Talk about more fuel for further uncertainty. Watching to see how this will further unfold is certainly going to be interesting to say the least.


  1. The price of copper has little to do with the US economy, which doesn't even consume all that much copper anymore, even during the best of times. It's all about China. The same thing is happening to aluminum.

    1. Unknown - that is a rather novel idea. here are the facts - China and the US are the two largest users of copper. GRanted, China is the key to copper but the US is not a pittance player in its demand equation.

      By the way, if the price of copper has little to do with the US economy, then pray tell why did it collapse in price back in 2008 when the credit crisis erupted here in the US. It was not China in which the credit crisis began, but rather the US market which set the price falling. The US then had the spillover effect into the rest of the global economy thus impacting China negatively and curtailing copper demand in that nation.

      The only thing I will tell you is that Dr. Copper is an excellent indicator of investor sentiment in regards to growth or lack thereof. It is not fool proof but it has a pretty damned good track record.

    2. As you noted, the economy in China cratered in 2008-09 as well.

      Perhaps I over-stated the US's role in copper consumption, but the fact is, US copper consumption peaked in 2000 and has been generally going down ever since. It is no longer the market mover.
      Page 6, Table 1, Line 16

    3. Unknown;

      last comment from me on this. I am not here to engage in a discussion about which nation on earth is the largest consumer of copper. That is totally beside the point I am making with this recent divergence between copper and the S&P 500. The point is that global stock markets nowadays tend to rise and fall together due to the nature of our integrated and intertwined global economy. A slowdown in a major zone therefore tends to negatively impact all global equity markets as a general rule. When Euroland was having its woes, global equity markets moved lower in tandem just as they did during the height of the credit crisis in 2008. When China woes surface and traders fear a slowdown in China, global equity markets also tend to have difficulty mounting strong rallies. we live in a new era in which interconnectedness is the name of the game. That goes back to my point. If copper is going one way and the equity markets are going another, something is off base. It will resolve itself eventually with both markets moving in a similar direction if recent history is any decent guide. But it is certainly worth noting in my mind and is something unusual.

    4. One way the fed fuels and levitates the SP500 is by buying SP500 futures. As long as the hedge funds are confident the fed will continue to do that, they can enter the bubble SP500 with confidence.

      To make things consistent, they can buy a boat or air craft carrier size load of futures in copper market.

      Not saying they will or even care to but they could.

    5. Prioris,
      Very scary statement. First, you state the Fed is buying SP500 futures. Do you have any proof of this? I would love to see this on the Fedsite?

    6. http://www.marketskeptics.com/2011/06/the-esf-and-its-history.html

      Eric DeCarbonnel adds relevant discussion and documentation to the assertion of intervention into markets via S&P index options purchases by the Exchange Stabilization Fund

  2. Replies
    1. Thanks for sharing that.

      I also notice a failed HNS pattern on the DXY weekly.

  3. This comment has been removed by the author.

    1. I believe international cash flows have been pushing both USD and US stocks higher. For example, Japanese institutions and trader housewives (I am not kidding, it is what they do and it's a LOT of wealth) have been moving funds to US markets.

      They have also been pulling funds out of Australia, and I think that helps explain the divergence between AUD/USD (lower) and US stocks (higher)...

      So you see, there is unusual divergence in markets other than copper and S&P.

      Love the constructive exchange and insightful comments by both of you above. Good stuff.

  4. Great stuff as always Dan.

    BTW: the US isn't a big copper consumer anymore argument is irrelevant because your point is that Cu started this disconnect in 2013, but was tracking well before that, even though US copper consumption has been on decline since 2000.
    (2000, one could argue, was the apex of the US economy--any stock market surges after that were ginned up by Greenspan & Bernanke).
    Moreover, since the S&P 500 derives about 46% of sales outside of US, foreign demand for copper is more relevant than ever.

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