Dr. Copper Looks To Be Forecasting A Major Stock Market Tumble

For the most part the major stock market averages, such as the S&P 500 and the FTSE 100, follow the price of copper. Today however, there is a significant divergence between the two. The question is: Which asset is doing the better job of forecasting what’s to come in 2012? My guess is the answer’s copper.

As the chart below shows, the S&P 500 usually tracks the price of copper pretty closely, however as the highlighted time periods show, the two assets sometimes diverge, and that is the case today.

These periods of price divergence tend to resolve within a month or so, and given the macro economic outlook for 2012 it seems likely that demand for copper will fall – especially given the signs of a slowing economic expansion in China.

If copper has it right, we can expect a big sell off in the S&P 500 (and other major stock averages) possibly starting as early as next week.

An 18 Month Chart Of Copper with the S&P 500 Overlaid on top

Chart courtesy of Stockcharts.com

It’s also possible that the divergence will get even wider since copper appears to be forming a triangle pattern.

A 6 Month Chart Of Copper

Chart courtesy of Stockcharts.com

Copper have been in a downtrend since it peaked in February, and thanks to a strengthening US dollar, copper is likely to breakout of this triangle pattern to the downside. If this scenario plays out, the S&P 500 may have even further to fall to bring the two assets back in line.

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