Understanding how different financial asset prices interact with one another can provide a big edge to investors. We often consult “Dr. Copper” to get his prognosis on the US economy, because the US stock market moves up and down based on investors’ collective opinion on the economy.
The chart below, taken from our May12th Commentary entitled Recent Weakness In Copper A Red Flag For US Stocks, displays the close and stable positive correlation between COMEX copper and the Dow Jones Transportation Index over the past decade.
These two assets are related to one another because copper is used in manufacturing to make just everything you can think of, and the Dow Transports represent the shipping of those manufactures goods.
COMEX copper, Dow Transportation Index since 1999
In that report we said:
“The big negative divergence between copper prices and the Dow Jones Transportation Index since mid February strongly suggests that one of these two assets is temporarily mis-priced. Based on copper prices’ tendency to lead US equity prices, we believe that the US stock market is the mis-priced, over-priced one — and is vulnerable to an upcoming decline.”
Since that report, the broad market S&P 500 has already declined by 74 points or -5.5% is less than a month, and is threatening to extend its recent lossses.