Dr Copper’s Prognosis

Bloomberg reports:

Sales of existing U.S. homes unexpectedly declined, manufacturing in the Philadelphia region slowed and consumer confidence dropped, pointing to an economy that is struggling to regain momentum following the surge in energy costs.

Purchases of existing homes decreased 0.8 percent to a 5.05 million annual pace in April, the National Association of Realtors said today in Washington. The Federal Reserve Bank of Philadelphia’s general economic index fell in May to the weakest reading in seven months, and the Bloomberg Consumer Comfort Index slumped to a nine-month low, other reports showed.

— The result? Dow up 45 points, S&P 500 up 3, and the NASDAQ up 8.

— Yep, trying to make sense of the markets’ daily moves is a fool’s errand. No doubt investors took solace from the Fed’s minutes, released yesterday, that signalled monetary tightening would come ever so slowly. Which was news to some, apparently.

— But in a leveraged investment world, where hedge funds and investment bank prop desks play with borrowed money, one can get pretty edgy listening to the Fed. The US dollar carry trade has joined the infamous yen carry trade in providing the world’s financial and risk markets with liquidity. It’s what happens when your economy becomes so debt soaked that zero interest rates are required to keep its head above the water line.

— It is these speculators that lead the market’s day-to-day moves. Their focus is less on the economic stuff and more on the ramifications for liquidity flows. But as we’ve argued here previously, the second half of this year will likely be characterised by tighter liquidity as central banks around the world, both major and minor, look to tighten.

— So let’s take a step back and look at the bigger picture.

— What does old Dr Copper think about the situation? Well, the chart below indicates a rounding top formation. That’s not exactly bullish. Copper prices peaked in February this year and have been grinding lower ever since. The sell-off gathered pace in early May and now we’re seeing a bit of a rally. It’s still trading below it’s 50-day moving average (blue line) and has some work to do before you could start getting excited again.

— So if copper is a harbinger of future economic conditions then the slowdown theory should gather pace in the coming months.

Source: Stockcharts.com

The Dow Jones Industrial Average is not in agreement with the good doctor. A look at its chart (below) suggests an economy in rude health. As you can see the recent correction (on an intra-day basis) dropped right on the 50-day moving average and bounced nicely.

— There’s certainly no fear showing in the Dow’s performance. The index has, of course, been boosted by the weak US dollar. Viewed in Aussie dollar terms the Dow would look much, much worse. But the copper chart is in US dollars too. Why does it look a bit worse for wear? Maybe copper is focussing on the economic climate and the Dow is focussing on its buddy, the Fed?

— And with the Dow being the big dog of the equity indexes, the easy money flows to the easiest place. The Dow looks like it wants to have another crack at its recent high. Our predication is it will fail. In a few months, the chart will look quite different.

— (And if that’s how the Dow rolls – literally – we’ll be sure to give ourselves a plug down the track. If not, well, there’s plenty more charts.)

Source: Stockcharts.com

— If you want to see how the Dow has performed in terms of real money – gold – then things don’t look quite as rosy. The chart below shows the performance of the Dow in terms of gold, not US dollars, over the past three years. It’s ugly and goes to show how pervasive the illusion of money is in the modern monetary world.

Source: Stockcharts.com

— What about something a bit closer to home? Let’s try the ASX200. We’ve talked previously about Slipstream Trader Murray Dawes’s ‘point of control’ being around the 4,700 mark. Well, surprise surprise the index dropped through that point only to rebound and blast back through it yesterday. Prepare for more volatility around this crucial juncture. Our feeling – and probably Murray’s too – is that if we head back down through 4,700 again, we’ll be heading quite a bit lower.

Source: Bigcharts.com

— Speaking of Murray, he speared his first fish Wednesday as part of a new high-risk, high-reward ‘spear’ trading strategy. If you want to check out the details, go here

— Dashing Daniel Denning (we love alliteration… and irony) is back from the States working on a double issue of Australian Wealth Gameplan. We’re not sure what it is about but Dan attended some big oil and gas conference while he was over there so that might provide some clues.

— In a world of constant monetary debasement, accumulating hard assets (especially when they’re out of favour) seems like a pretty good strategy.

Greg Canavan
Markets and Money Australia

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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4 Comments on "Dr Copper’s Prognosis"

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This post is in response to this statement: “The Dow looks like it wants to have another crack at its recent high. Our predication is it will fail.” “On April 29 the Wilshire 5000 Index, S&P 500 Index, Nasdaq Index, Dow Jones Industrial Average, Dow Jones Utility Average, Dow Jones Transportation Average, and Russell 2000 Index all simultaneously hit new bull market highs (with the latter two indices reaching new all-time highs). There is no stronger confirmation possible that this bull market – which began in March 2009 – is still intact” (James Stack, LOTS OF EXCUSES TO BE BEARISH…… Read more »

I remain bullish too Watcher however this compression and divergence in our ASX200 (with Dow and AUD)is a killjoy for sure. I suppose things here remain over-leveraged compared with the US. It might take a set back here before our index can loosen up a little an make less restrained headway to the upside. Or maybe our index will generally under-perform the Dow through-out the government finance bubble era we are in. We’ve had quite some rate increases and strong currency moves. I’m sure Benny loves us for helping out. Cheers Watcher


Surely only one ‘s’ in focusing.


‘Focusing’ was on the show Letters and Numbers the other day. Apparently using one or two s’ is fine.

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