Copper and the Markets no Longer Dance to the Same Beat
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Once upon a time, before the era of Quantitative Easing, any signs of strength from copper would be construed as a positive development for the economy, the stock market -- and vice versa. Based on the price action of copper, even if one stretched the truth to the limit, one cannot make such a case anymore.
In fact, based on the price action of copper, the Dow should have crashed long ago. The markets are marching to their own drumbeats. After the financial crisis, copper can no longer be used as a reliable indicator of market direction.
The following charts will help cement that point:
A quick glance at the five-year chart reveals that copper prices have crashed. As it is a leading indicator, one would expect the same from other major indices such as the DOW , NASDAQ, etc.
Instead of following the so-called leading indicator into the gutter, the Dow has soared upwards and never looked back since it bottomed in 2009.
One would expect something different from the housing index, but if you look at the chart below, the housing index has also soared while copper crashed.
Can copper still be considered a leading indicator? The name lagging indicator might be more appropriate, given the current circumstances.
Why Are the Markets Trending Higher If Copper Is Crumbling?
The markets are likely being propped by hot money.
After QE ended, the corporate world stepped in with enormous share buyback programs. This year, corporations are on track to spend one trillion on dividends and share buybacks, setting yet another record. However, this massive share buyback spree is supported because of the ultra low rate environment the Fed has maintained for a record period. This environment favors speculators and punishes savers -- and is Godsend for corporations.
Nearly seven years into this bull market and over 50% of the public is still avoiding the stock market. This means that this bull market could run up a lot higher. Markets top out when the masses are euphoric, and the sentiment is far from euphoric right now.
Markets climb a wall of worry and tumble down a cliff of Joy. There is a lot to worry about right now. Earnings recession, a possible rate hike, etc., but there is not that much to be euphoric about; the path of least resistance is still up.
Finally, even if the Fed's raise rates in December, it's going to be treated as a non-event. The market has already priced this in and this is just going to be an isolated rate hike. Copper is clearly indicating that this economic recovery is all smoke and mirrors. While the markets have soared, this leading indicator has suffered from cardiac arrest and is about to go into a coma. A 0.25% rate hike is not going to stop the flow of hot money, and hot money is what is propping these markets up and will continue to do so in the foreseeable future.
This article was prepared by Sol Palha senior analyst at the Tactical Investor an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.