Ready for a correction?

S&P 500 and spot copper, weekly prices, July 2007 to July 2012, with correlation below

I’ve previously written about the relationship between copper and equities, and the underlying premise is simple: as industrial activity surges so do copper prices. In other words, its a great bellwether for the global economy, one that I like to watch carefully to figure out what’s going on. Since copper is actively traded and priced in real time, its much more timely that GDP, for example. In any case there is something interesting going on with copper and equities – the chart above has two parts: the first shows weekly prices for the S&P 500 ($SPX, black line) and spot copper ($COPPER, red line), and the lower chart show the weekly correlation between the two assets. The correlation across the five year term is a relatively high 0.60, but perhaps more importantly everytime the correlation breaks down equities fall in price.

The chart below shows the S&P 500 and spot copper over the past month; correlation is now 0.10 and falling. Equities continue to rise while copper falls, and many market participants are now short the metal. A correction in the US equity markets over the next month or so seems imminent, and in fact I’m planning for it.

S&P 500 and spot copper, one month daily prices

S&P 500 and spot copper, one month daily prices

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