With a PhD in economics, “Dr. Copper” is widely followed as an important economic barometer.
Demand for Copper is known to foreshadow things to come.
And in an ominous sign, Copper is breaking down.
One method to visualize this breakdown is through a simple Relative Strength comparison.
Check out this chart comparing the Relative Strength of Copper to Gold. This is another means of comparing growth/risk-on trade (via Copper) to the defensive/risk-off trade (via Gold).
And here we have it – the growth trade failing to hold strength vs. risk-off with Copper falling in relation to Gold.
And rather than breaking out in what would have been a textbook continuation pattern, this important ratio has fallen to its lowest levels in 16 months.
Let’s back up a bit and set the stage.
Copper surged off the 2020 Covid lows along with growth assets around the world.
Then in 2021, Copper ran into price resistance at its former 2011 highs, moving sideways for most of the year.
The question we were asking then was will Copper consolidate sideways for a while – digest its huge gains and then breakout to its next leg higher confirming the global growth trade?
Or will Copper turn back at the 2011 highs, signaling a slowdown for growth stocks?
We already witnessed the most growthy sectors (Tech, Communications, and Consumer Discretionaries) roll over in Q4 2021.
Since then, these three sectors have gotten crushed under the weight of massive sell-offs from investors bracing for higher rates and a potential recession.
And now Copper is rolling over after a year-long topping pattern.
We’ve been looking at 4.00 as an important area of support, marking the 2021 lows.
In order for the Bull case to have any merit, Copper had to bounce off support and move higher, helping to confirm the narrative for renewed growth.
So far, the Bulls didn’t get what they needed. In fact, Copper sliced right through former support on its way to a new 52-week low.
With ongoing weakness in Copper, the future for global growth and our long-held narrative for a commodity supercycle is in serious doubt.
Copper rolling over to fresh 52-week lows casts further doubts about the rate of inflation and, more importantly, the prospects for economic growth.
This is a 1-2 punch for cyclical assets.
The fresh lows on these charts have broad implications for the entire Commodity space as well as cyclical stocks. We’re already seeing it.
We’re beginning to see Energy and natural resource stocks come under increased selling pressure.
And many of the sideways consolidations across the commodity space are resolving lower – much like Copper.
For now, the path of least resistance is lower for many of these former leaders in the Energy and Commodity space.
Now is not the time to be greedy – now is the time for patience and proper position sizing…
Until next time, invest wisely…
P.S. To learn more about Rowe Wealth can help you weather the current turbulent markets, you can schedule a free 1-hour consultation here.
Get Our FREE Guide
How to Find the Best Advisor for You
Learn how to choose an advisor that has your best interests in mind. You'll also be subscribed to ADAPT, Avalon’s free newsletter with updates on our strongest performing investment models and market insights from a responsible money management perspective.