Copper Stocks Don’t Buy The Rally

Something interesting has been going on in one of our commodity intermarket models.  While the price of copper has surged back from the lows of 2016, it seems that copper stock analysts don’t quite buy the rally.  A significant divergence between the copper price and copper stock relative performance has opened up, and this is the kind of divergence that usually will end up closing one way or the other.

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The chart comes from the latest edition of the Weekly Macro Themes report and was part of a wider discussion on global equity relativities and some of the extremes and opportunities such as this one.

The chart in question shows the LME Copper Spot price vs the Euromoney Global Copper Miners Index relative to the MSCI World Index.

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I study charts and intermarket relationships such as this one for a couple of reasons.  First up is the information that it can bring on the actual commodity price.  For instance, if copper stock relative performance is heading down then that can actually offer clues about what to expect from the copper price itself.

Copper stock relative performance is driven by investors who no doubt will be closely studying the profitability and financials of these companies along with the industry dynamics and will be scouring the wires for every detail that drives the copper industry and the individual companies.

This means this group of investors should have a view on where copper prices are going.  So if they effectively disagree with where price has gone (based on lackluster relative performance) then that could be a sign.  This seemed to be the case in the 2009-10 period just after the financial crisis, and 2013-15 into the commodity crunch.

By the same token, it can on the contrary uncover opportunities.  These investors and analysts are equally liable to the various biases and extremes of investor sentiment and could end up too pessimistic (as in 2006 where copper stock prices lagged the price of copper... only to catch up dramatically later on in 2007.

Just goes to show, that however you interpret today's chart, it pays to study the intermarket dynamics.  Time will tell in which direction this divergence closes, and if China can hold growth steady again in 2018 then there could be another dramatic catch up on the cards for copper stocks.  We'll be looking closer at copper this week as commodities come front of mind

This article originally appeared as a submission at See It Market

For more and deeper insights on global economics and asset allocation, and some more good charts you may want to subscribe to the Weekly Macro Themes.  Click through for free look or a trial.

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Article by Callum Thomas, Top Down Charts

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Topdown Charts: "chart driven macro insights" Based in Queenstown, New Zealand, Topdown Charts brings you independent research and analysis on global macro themes and trends. Topdown Charts covers multiple economies, markets, and asset classes with a distinct chart-driven focus. We are not bound by technical or fundamental dogma, and instead look to leverage any relevant factor to capture the theme. As such, here you will find some posts that are purely technical strategy, some that just cover economics and data, and some posts that use multiple inputs to tell the story and identify the opportunities. Callum Thomas Head of Research Callum is the founder of Topdown Charts. He previously worked in investment strategy and asset allocation at AMP Capital in the Multi-Asset division. Callum has a passion for global macro investing and has developed strong research and analytical expertise across economies and asset classes. Callum's approach is to utilise a blend of factors to inform the macro view.