Inflation Expectations, What’s Doctor Copper Predicting For the Stock Market?

By: Graham_Summers

Copper is often called Dr Copper as the metal is considered a bell-weather for the world economy due to its close correlation to economic growth (used by many industries, copper typically rallies when the world economy is growing).

Indeed, one of the first signs that the market was going to rally rather than fall off a cliff during the Euro Crisis Round 1 in June came from Copper. As the below chart shows, the metal bottomed in June, preceding the stock bottom by almost a month. Since that time, the correlation between stocks and copper has strengthened to the point that today, the two assets are trading together on a near tick-for-tick basis:

With that in mind, today I want to focus on the metal for signs of what’s to come in the markets. The first and most important item to note is that copper is coming up against long-term resistance. A breakout here would indicate the “inflation trade” is prepared to explode higher in a major way.

 Is this a sure thing? Not necessarily, copper has actually just formed a rising bearish wedge pattern in the last six months. These patterns tend to be topping patterns which preclude sharp sell-offs down to the base (in copper’s case 2.80 per pound) when broken. As you can see, copper broke this pattern in early November.

This latest rally has brought copper up to test the broken trend-line. A rejection here would likely precede a sharp sell-off back down to $3.70 per pound. And if we take out the downward support line (green line above) then we’re going down in a BIG way.

Keep your eyes on the Doctor, he may be flashing a warning signal to stocks.

Graham Summers

http://gainspainscapital.com

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Graham Summers: Graham is Senior Market Strategist at OmniSans Research. He is co-editor of Gain, Pains, and Capital, OmniSans Research’s FREE daily e-letter covering the equity, commodity, currency, and real estate markets. 

Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.

Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.

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