"That's nice," you say, "Of interest to the commoditistas once again walking the earth and celebrating the first ascent of the CRB index over the 300 level in nominal terms since 1981. But it's of no value to me, an adroit stock trader." Well, adroit is not just a city in Michigan: For all the ink spilled on the macroeconomic impact of higher energy prices, it turns out that copper prices, acting by themselves and as a proxy for other base metals such as aluminum and nickel, have a broader and more diverse impact on the stock market groups than do higher energy prices. Therefore, those watching to see how the market absorbs the threat posed by higher energy prices should watch copper prices as well.

Intermarket Relationships

The skills required for successful intermarket analysis are similar to those required for three-dimensional chess and catching fish out of a stream with your bare hands. The relationships are slippery and change frequently, not so much in the direction of their impact on a given market's performance, but in the relative strength of these impacts. Think of them as primary colors in a paint mix. The dash of yellow can be overwhelmed easily by blue or red in a given mix, but it still contributes a yellow tint. It's the same for equities. All else held equal, lower interest rates always are a positive partial contributor to higher stock valuations, but their effect can be overwhelmed by negative earnings expectations.

As mentioned in a recent Columnist Conversation posting, all of these effects have to be weighed together on a systemwide basis, one in which the various relationships are weighed together to see which are in fashion at the moment. Let's take a look at the latest relative contributions within this model of copper and crude oil to the performances of the nine economic sector ETFs in the S&P 500. (There are 10 sectors, but the Telecommunications sector does not have an associated ETF.)