A Doctor Sends a Flashing Warning Sign!

The focus of the entire investing world has once again turned to Europe, where concerns about Spain are leading markets lower. And while traders are watching every headline out of the region and focusing on 10-year yields, one of the leading indicators I watch broke down last week. That has me concerned for the overall markets.

Copper traded to a new low since starting a downtrend in mid-February, and from a technical standpoint that tells me lower lows are ahead.

Now it’s important to remember that copper is a commodity. And there can always be commodity-specific news and supply/demand fundamentals depressing a commodity that aren’t necessarily indicative of the greater economy.

To account for this, professional traders watch copper and the base metals in aggregate as it’s said they collectively have a “Doctorate” in global macro-economics. Base metals are on the leading edge of the growth, or contraction, of the global economy. And they often lead equity markets in direction.

Here is what happed last week that has me so concerned: Copper and the base metals rallied sharply on Thursday, but then made lower lows for the most recent trend on Friday! You can see it in the chart below.

This is concerning in that the data we received from China — the most important country in the world with regards to commodity demand — showed the prospects for a “soft landing” were, in fact, on the rise.

An old rule of trading states that when a stock or commodity should rise based on news but doesn’t, it’s a sign of further weakness. Copper gave us that sign last week. At the same time, base metals are also sending a warning signal.

And unless we get some good news from Europe or the economy, I’m concerned that this “Doctor’s” prognosis is for lower stock prices in the immediate term.

Best,

Tom