Wednesday, March 9, 2011

Dr. Copper

The commodity with a PhD in economics, Copper, is showing signs of slowing here. It is viewed as a fairly reliable leading economic indicator because so much of it is used in the production of industrial goods. Copper is used specifically in wiring, heating, plumbing, and many electronic goods. When there is less demand in these specific areas, the demand for copper falls and that is reflected in the price of the metal. The industrial metal is currently off almost 10% from its high in the beginning of February, as shown in the chart below. Additionally, it has fallen significantly below its 50-day moving average, and the average is starting to slope downwards.

We spoke with an independent technical analyst this afternoon who echoed our thoughts that there are many warning signs emerging at this time. He specifically mentioned copper, the CAC 40 Index (the benchmark stock index in France), and semiconductor stocks as areas issuing the same warning signals. The S&P 500 is currently at an indecision point reflected by the tight range in which it has traded over the last 2 weeks. We will be watching closely to see whether the bulls or the bears win this battle, but our “weight of the evidence” approach has turned cautious in the short term.