Copper, Industrial Metals Flashing Warning Signs

 |  Includes: AA, BHP, FCX, RIO, SLB, VALE
by: James A. Kostohryz

The idea that “Dr. Copper has a PhD in economics” is certainly over-hyped. But it also happens to be true that the copper market has served as a pretty good leading indicator for both the trend of economic growth and global stock markets including U.S. equities such as SPY, DIA and QQQ as well as equity indices such as the S&P 500 (^GSPC), Dow (^DJIA) and Nasdaq (^IXIC).

As can be seen above, the action in copper in the last few days is certainly not suggesting an upside break of the recent trading range for equities. At noon today, copper was down more than 3.0% and exhibiting strong downside momentum, breaking through several short-term support levels. While, this is not a definitive sell signal for equities, it should be interpreted as a caution, at least.
As of 12:00 noon on Wednesday, October 19, aluminum and other metals prices were also down more than 2.0%.
Unless a convincing deal is struck over the weekend by European leaders, copper will likely retest the $3.00 level - a level which I predicted here two months ago and which I reiterated here.
The importance of European events to copper is largely via China. China’s economy is highly export dependent. Given the potential impacts of a crisis in Europe on global growth and given that Europe is China’s largest export client Chinese demand can be affected. As reported recently, Chinese equities are also sending warning signals of non-confirmation of the global relief rally in equities.
In the event that European leaders do not put forth a convincing plan and PIIGS spreads start to widen, I would expect copper to move toward $2.50 while oil could be expected to move into the $60s.
I believe that investors should avoid or short commodity-oriented stocks such as Freeport McMoRan (NYSE:FCX), Rio Tinto (NYSE:RIO), Southern Copper (NYSE:SCCO), Vale (NYSE:VALE), Alcoa (NYSE:AA), BHP Billiton (NYSE:BHP), IEZ, Schlumberger (NYSE:SLB), Weatherford (NYSE:WFT), Andadarko (NYSE:APC), ConocoPhilips (NYSE:COP) and Chevron (NYSE:CVX).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: As per a StockTalks post I purchased puts on DBC near the close yesterday as well as puts on the S&P 500 and calls on TLT to protect a short there.