Copper trend confirms long term global bear market

Copper, a leading indicator of the financial markets and the economy, has confirmed a long-term bearish trend. This does not augur well for global equities. However, India and China may hold the key to killing the bear, at least in the medium term.

The prices of copper have been rolling over at a slow pace since February, reacting to the monetary tightening in India and China. These two countries are large consumers of the metal and, as their central banks began increasing the cost of money, copper prices weakened. The reason is simple: as the return on cash increases, people move out of copper to cash. Also it becomes more expensive to hoard copper.

Copper, or for that matter, the equity markets, can turn bullish if the central banks of the two countries begin easing money supply. That, combined with the accommodation of the US Federal Reserve, will definitely give a caffeine rush to the markets.

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But those rallies will be short-lived unless India and China can return to real growth with low inflation and the western economies can avoid a double-dip recession. As proven by the quantitative easings in the US, the financial markets cannot sustain bull runs with monetary stimulus alone.

These are the opinions of economists - and this analyst. But buyers and sellers in the market far outnumber economists and analysts. So let’s look at what these buyers and sellers are doing and see who is winning based on the price action in the markets. For it’s the buyers and sellers that have skin in the game. Arm-chair analysts can only gaze into the crystal-ball and hope they are right.

The relationship between copper, the equity market and the economy has been clearly established time and again. Since copper is used in most manufacturing processes, a fall in copper prices shows a drop in demand for the metal. This, in turn, indicates that manufacturers don’t need the metal as they foresee a slowdown in their business.

As manufacturing slows down, so does the economy. Since the stock markets discount the future, they tend to fall a little after copper prices fall, and vice versa, in a bullish scenario.

A look at the copper chart (view chart) will show theleading effect of this metal on the equity market. The copper chart is in green at the top and the S&P 500 equity index chart is at the bottom in orange.

Note that in December 2008, as shown by the white vertical line on the left, copper stopped falling and began to rally. However, the S&P 500 index began to rally only a few months later. Again in February 2011, as shown by the white vertical line on the right, copper had begun falling, but the S&P 500 continued to rally and fell strongly in the past couple of months. The yellow lines on the charts show how copper changed direction first and the equity markets followed.

Now let’s look at what copper prices are doing currently. The weekly copper chart (view chart) shows that the 30-week moving average is sloping down and prices are below it. A weekly chart is where each candle stick on the chart shows the price action for one week.

Long-term investors use a technique called the four stages of the market to see if prices are bullish, bearish or moving sideways. The markets move in four stages - sideways at the bottom, a rally, sideways at the top, and a selloff.

As long as prices are above the 30-week moving average and the average slopes up one stays bullish. When the average moves sideways with prices moving above and below it, one stays neutral. Finally, when prices fall below the average and the average slopes down, the bias is bearish.

Copper’s moving average began sloping down a month ago with prices below it. We feel that the bearish bias was confirmed as prices tried to rally last week, but could not break above the average. In a bearish market, the 30-week moving average acts as a ceiling to prevent prices from rising above it. In a bullish market, the average acts as a floor, preventing prices from falling below it.

As a trading strategy, one could stay short in the market as long as prices don’t close above the 30-week moving average of copper.

George Albert is Editor, www.capturetrends.com